Why it matters: From April 2027, unused pension pots will face inheritance tax for the first time, potentially leaving families with combined tax bills of up to 76% on inherited retirement funds.
The big picture: The Treasury's decision to bring pension death benefits into inheritance tax scope represents a fundamental shift from the current system, where families can inherit untouched pensions tax-free.
Andrew Diver, Head of Tax at Beatons Group Chartered Accountants in Ipswich, said thousands of Suffolk families could face devastating tax bills as a result of the changes.
"This is a huge adjustment, and we've already started advising clients across Suffolk to take action," he said. "It brings a significant amount of wealth into the scope of IHT – and people who previously wouldn't have paid it may suddenly find their pension pot tips them over the threshold."
Ipswich-based financial advisor, Farida Rouane, of Upside Finance, agrees:
Pensions have been utilised as a method of inheritance tax planning, especially where reducing liability has been a priority. The implementation of inheritance tax on pensions changes the landscape considerably, not just for people drawing their pensions, but for people planning for the future.
The details: From 6 April 2027, most unused pension funds and death benefits, including those from defined benefit and discretionary schemes, will be included in estates for inheritance tax purposes. Personal representatives will be responsible for reporting and settling any inheritance tax due – potentially up to 40% above the nil-rate band – rather than pension providers.
Beneficiaries will then face income tax when withdrawing the money – creating the potential for a combined 76% tax hit.
"Nobody wants to think that only 24% of their pension might be left after tax," Andrew said. "It's changing people's approach completely – many are now drawing down pensions earlier to avoid the punitive charges."
However, certain payments will remain exempt, including death-in-service lump sums from registered pension schemes and transfers to spouses, civil partners, or charities.
Louise Gladwell, a financial planner at Kingsfleet, said: "For individuals with substantial pension savings, this change could result in a significant IHT liability. With that in mind, it would be sensible to review your pension arrangements well ahead of 2027."
The other side: The government claims the change is designed to "deliver a fairer, less economically distortive tax treatment of inherited wealth."
However, former Pensions Minister Steve Webb warned it places a heavy administrative burden on grieving families.
"People will have to track down every pension the deceased held, contact schemes, crunch the numbers, and pay the tax bill – right when they're navigating a loss," Webb said.
What to do: Andrew has advised Suffolk residents to review their pension strategies, particularly if they are planning to leave funds untouched, update estate plans to factor in the new tax rules, and seek professional advice.
Seeking professional advice can help you understand your options and take steps to manage your estate's potential exposure. An independent financial adviser can guide you through strategies such as pension consolidation, lifetime gifting, and ensuring your expression of wishes is both up to date and valid.
The bottom line: Suffolk families have until April 2027 to adjust their pension and inheritance planning to avoid potentially devastating tax bills that could slash retirement inheritances by three-quarters.
