With changes to the inheritance tax treatment of pensions due to take effect in April 2027, estate planning professionals should be thinking about how existing arrangements may be affected – and whether clients need to review their plans.
Estate planning is rarely a one-off exercise. Changes in legislation, personal circumstances and the value or composition of an estate can all affect whether existing arrangements continue to reflect a client’s wishes.
With the inclusion of most unused pension funds and pension death benefits within the inheritance tax (IHT) estate due to take effect from 6 April 2027, now is a timely opportunity for estate planning professionals to revisit the subject with clients.
The latest Budget update has clarified two technical aspects of the forthcoming rules. While these amendments do not change the fundamental policy, they reinforce the importance of keeping up to date and understanding how the new regime may affect different estates.
What is changing from April 2027?
Under the forthcoming reforms, most unused pension funds and pension death benefits will be included in the value of a person’s estate for IHT purposes.
Currently, many pension death benefits can fall outside the estate for IHT, depending on the type of pension arrangement and how benefits are paid. From April 2027, their inclusion in the IHT calculation may change the tax position of some estates and the amount beneficiaries ultimately receive.
The impact will vary from client to client. Not every estate will become liable for IHT, and the treatment of pension benefits will depend on the nature of the arrangement and the relevant exemptions. However, where pension wealth is significant, its inclusion could affect the overall estate value and potential tax exposure.
For practitioners, this is an important reason to consider whether existing estate plans remain appropriate in light of the forthcoming changes.
What has the latest Budget clarified?
The latest Budget update confirms two technical amendments to the rules, both taking effect from 6 April 2027.
- Paying pension-related IHT before the grant
Subject to conditions, a person expecting to become the personal representative of an estate will be able to instruct the pension scheme administrator to pay pension-related IHT directly to HMRC before obtaining the grant.
This is intended to make it easier to pay the tax before the grant is issued, particularly in cases involving intestacy or where the named executor is unable to act.
- Flexibility when calculating the reduced charitable IHT rate
The rules for determining whether an estate qualifies for the reduced 36% IHT rate where at least 10% of the relevant amount is left to charity will also change.
Those administering an estate will be able to choose whether notional pension property is included in the estate’s general component or treated as a separate component for the charitable giving calculation.
This flexibility matters because the way pension property is allocated can affect whether the 10% charitable giving threshold is met. Depending on the circumstances, treating pension property separately or combining it with the general estate may produce a more favourable result.
These amendments clarify aspects of how the new rules will operate, but they do not alter the fundamental change to the IHT treatment of most unused pension funds and pension death benefits.
Why existing estate plans may need to be revisited
A Will may have been carefully drafted to reflect a client’s circumstances and objectives at the time. However, a change in tax legislation can be a reason to reassess whether the wider estate plan continues to achieve the intended outcome.
The forthcoming pension reforms provide an opportunity for practitioners to identify clients who may benefit from a review, particularly where pension wealth represents a significant proportion of their overall assets.
Depending on the client’s circumstances, a review may include considering:
- The overall estate: How might the inclusion of pension benefits affect the value of the estate for IHT purposes?
- Existing Will provisions: Do the current arrangements remain appropriate in light of the client’s wishes, family circumstances and potential tax exposure?
- Pension arrangements and beneficiary nominations: Should these be considered alongside the Will and the wider estate plan?
- The intended distribution of assets: Could the changes affect what beneficiaries receive or the way the estate is administered?
- Charitable giving: Where relevant, could the new rules affect eligibility for the reduced 36% IHT rate?
The answers will depend on each client’s individual circumstances. The changes do not mean that every Will needs to be rewritten, nor does a Will alone determine how pension benefits are treated for IHT purposes. Rather, they provide a timely prompt to check that the different elements of a client’s estate planning arrangements continue to work together as intended.
Turning legislative change into client conversations
With April 2027 approaching, practitioners can use the forthcoming changes as a reason to reconnect with clients and encourage them to consider whether their existing arrangements remain suitable.
This could include identifying clients whose estate plans were created before the reforms were announced, particularly those with substantial pension assets or potentially complex IHT considerations.
Proactive conversations can help clients understand the implications of the changes and establish whether a review is appropriate. They also reinforce the value of treating estate planning as an ongoing process, rather than something that only needs attention when a major life event occurs.
Keeping clients informed about legislative developments is an important part of helping them make decisions with confidence. It also gives practitioners an opportunity to demonstrate the value of regular reviews and ongoing professional advice.
Estate planning doesn’t stand still
The pension IHT reforms are a reminder that estate planning must evolve alongside legislation and clients’ changing circumstances.
The latest Budget amendments provide further clarity on how aspects of the new regime will operate. But the wider message remains: as the rules change, existing arrangements may need to be revisited to ensure they continue to reflect clients’ intentions.
For estate planning professionals, staying informed and recognising when a review may be appropriate are essential to helping clients plan effectively for the future.
The key takeaway? April 2027 is a timely prompt to revisit the conversation — and check whether existing estate plans still do what clients need them to do.
This article is intended for general information and does not constitute legal or tax advice. The appropriate course of action will depend on individual circumstances. Practitioners should refer to current legislation and HMRC guidance when advising clients.
