The Pension That Becomes an Estate

Children work out early that you save the best bit of the meal until last.

It is a reasonable strategy and it has one failure mode, which is that the rules can change while you are still eating. A sibling reaches across. A plate is cleared early. The thing you protected by not touching turns out to have been the thing most exposed.

British pension planning has spent about a decade doing precisely this, with official encouragement.

The old order

Since 2015, unused pension funds have generally sat outside the estate for inheritance tax. The planning that followed was straightforward and almost universal: spend other assets first, leave the pension untouched, and pass it on. For someone with substantial wealth and a strong income, the pension became the last thing to draw on and the most efficient thing to leave.

Whole retirement strategies were built on that ordering. Wills were drafted with it in mind. Death benefit nominations were completed on the assumption that the fund would pass outside the estate.

From April 2027

Unused pension funds are due to be brought within the estate for inheritance tax from 6 April 2027. The asset that was the most efficient thing to leave becomes, for larger estates, one of the least.

Two consequences follow, and the second is the one people miss.

The first is that the pension now potentially bears inheritance tax at 40% above the available thresholds, along with everything else. The nil rate band remains £325,000, unmoved since 2009 and frozen for several years yet. The residence nil rate band adds up to £175,000 where a home passes to direct descendants, and it tapers away entirely on estates above £2m.

The second is the interaction with income tax. Where death occurs after age 75, pension death benefits are already taxable as income in the hands of the beneficiary at their marginal rate. For a barrister's adult children, who may themselves be high earners, that rate is unlikely to be low. Inheritance tax on the fund and income tax on what is drawn from it are separate charges on the same money.

What actually needs doing

Not much of it is complicated, and almost none of it is urgent in the sense of this month. But it does need doing before it matters.

The order of spending in retirement may reverse. If the pension is no longer the most efficient asset to leave, the case for preserving it and drawing on everything else weakens considerably.

Death benefit nominations should be looked at. Many were completed years ago on assumptions that no longer hold, and a nomination that made sense in 2018 may not now.

And gifting deserves proper thought, because it is the one part of this that depends on time rather than money. Gifts fall out of the estate after seven years, and nothing shortens that. Regular gifts out of surplus income are immediately effective where the conditions are met, which suits someone with a strong income and more of it than they need, a description that fits a good deal of the commercial Bar.

None of which is a reason to do anything hastily. It is a reason to look at arrangements made under the old rules before the new ones arrive, which is a considerably smaller job in 2026 than it will be in 2028.

This article is general information based on legislation in force and announced at the date of publication, both of which may change before implementation. It is not personal advice and individual circumstances differ considerably. Inheritance tax planning, tax advice and trust advice are not regulated by the Financial Conduct Authority. The value of investments can fall as well as rise and you may get back less than you invest.

Altor Wealth Management LLP advises barristers and other self-employed professionals from our offices in Hook, Hampshire, and across Surrey, Berkshire, Sussex and Kent.