Have you been worrying about how your pension might be taxed in the future? If you’re wondering whether pensions are still the right way to save for your retirement, you’re not alone. Now’s the time to consider your estate planning and ensure you have the right approach to protect your money and your future lifestyle. We explore the latest pension changes and what you need to consider, so you can look forward to a worry-free retirement.
When does inheritance tax on pensions start?
There’s been some confusion over pensions since the Autumn 2024 Budget announcement. From 6 April 2027, defined contribution pensions, including SIPPs (Self-Invested Personal Pensions) and SSASs (Small Self-Administered Schemes) will form part of your taxable estate on death. Values above the nil-rate band (£325,000 per person, potentially up to £1m for couples with the residence nil-rate band) may be taxed at 40%.
This huge shift means that pensions could lead to significant IHT (inheritance tax) bills for certain estates for the first time. Also, if your pension is being left to non-spousal beneficiaries or if you have property-heavy pension assets, then you’ll need to get advice.
SIPP and SSAS pension holders could face extra issues, such as liquidity problems. Property-heavy assets (property within a pension) may create liquidity problems, and beneficiaries could struggle to pay IHT without selling property or complex restructuring.
What does inheritance tax on pensions mean for my family?
As the new IHT inclusion means that pensions could now be subject to tax on death, this changes how people might use their pensions for legacy planning. A large unused pension could reduce what you intend to leave to your loved ones. So, if you don’t review your financial plan, your family might face a large, unexpected IHT bill when you die.
Also, if your estate breaches the £2 million threshold (now more likely with pension pots being included), you may lose valuable residence nil-rate band reliefs. This could increase your estate’s overall tax liability even further.
Where there’s property in SIPPs or SSASs, this could delay access to funds and create a significant administrative burden. Illiquid pension assets could force beneficiaries to make a quick sale or take on debt so they can settle IHT on a deceased’s estate.
Are pension savings still worthwhile for retirement?
Despite the upcoming changes, pensions continue to offer important advantages:
- Immediate tax relief on contributions, tax-free investment growth, and flexible access to pension savings from age 55 (57 from April 2028).
- Income drawdown and annuities can help you structure your retirement income so it’s more tax-efficient.
- Death benefits paid to spouses will remain IHT-free, helping to support married and civil partner couples.
However, relying solely on pensions for legacy planning is no longer a recommended strategy. The new IHT rules mean diversification and periodic reviews will now be critical.
Don’t abandon your pensions; just make sure they’re part of an integrated and diversified retirement plan that’s aligned with your personal goals.
Suggested approach for retirement savings strategy
We’ve listed some approaches to consider when it comes to your retirement planning:
- Diversify: Use your pensions as a key part of your retirement plan, but aim for a balance using ISAs, well-diversified investments and gifting strategies. This approach will help to alleviate potential IHT and may offer flexibility for some families.
- Liquidity: If you hold property in pensions such as SIPPs or SSASs, make sure you have liquid assets elsewhere, so your beneficiaries can pay potential taxes.
- Regular reviews: Stay updated as and when the latest Budget announces any changes to pension legislation and dates. You should check and update any beneficiary nominations and review your estate planning at least annually.
- Professional advice: Speak to your financial planner to get a strategic cash flow and estate planning forecast. With changes in legislation, getting professional financial advice is more important than ever.
What’s the potential impact of the pension changes?
The pension changes will have a big impact on estates, the amount of inheritance tax (IHT) paid by families, and increased revenue for the government:
- 10,500 extra estates could face IHT
- 38,500 estates might pay more IHT
- £3.44bn in estimated IHT revenue
With careful financial planning and the right advice, pensions can still support a secure retirement and your legacy. However, if you rely solely on your pension, this could mean higher taxes and unfulfilled legacy plans.
Our recommendation is not to leave things to chance after the 2027 pension reforms. Use an expert financial planning firm to carry out regular reviews, so you can optimise your estate in advance of any changing tax rules.
Retirement Planning, Nottingham
Pensions are still a useful way to save for your retirement, but now require careful consideration due to changing IHT treatment. When it comes to retirement planning, it’s worth considering alternative options as well as pensions as part of your overall financial plan. Pension savings should not be your only source of funding for your retirement.
At Balance: Wealth Planning, we have a team of calm, strategic experts who are committed to helping our clients make confident choices about their retirement. Whether you’re nearing retirement or decades away, it’s important to have periodic reviews, so you understand your pension forecast and can adjust your savings strategy.
Our financial planners will talk to you about your priorities and your long-term personal goals. We’ll carry out a full review of your pensions, savings and investments, so we can see your financial situation. Together, we will develop a pension strategy that supports your lifestyle.
Get in touch with our financial planners to book your retirement and estate planning review.
Sources:
https://www.investcentre.co.uk/articles/how-inheritance-tax-changes-will-affect-pension-planning
https://www.hamlyns.com/blog/changes-to-inheritance-tax-iht-on-pensions-from-2027/
https://professionalparaplanner.co.uk/technicalzone/sipp-ssas-liquidity-post-autumn-2024-qa/
https://www.mha.co.uk/insights/inheritance-tax-pensions-changes-april-2027
