A financial expert has called on people to review their pensions ahead of a significant HMRC shake-up.
From April 6, 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased person’s estate for Inheritance Tax purposes. This removes distortions which have led to pension schemes being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for funding retirement. It also removes inconsistencies in the Inheritance Tax treatment of different types of pensions.
Chris Ball, CEO at tax and pension advisers, Hoxton Wealth, explained: “Leaving your pension untouched before you die is no longer a good move. For years, the advice was to spend everything else you had first, to leave your pension alone, and pass it on to your loved ones when you passed away.
“From April 6 next year, pensions are no longer off-limits for HMRC. And if yours is large enough, when you die – as much as 40 per cent could go to HMRC, with the remaining 60 per cent to your family.
“So how do you move your pension out of your estate, while you are still alive? If you draw money from your pension, gift it to a loved one and survive seven years after that gift is made, that money falls outside of your estate as far as inheritance tax is concerned.
“You will pay some income tax when you draw from your pension, however the alternative is your family paying 40 per cent inheritance tax on it when you pass away.
“Let’s say you draw £500,000 from your pension and gift it over a period of time, if you survive seven years, that half a million pounds is outside of your estate. Compared to paying 40 per cent inheritance tax on the same amount, that saves your family £200,000.
“Planning here is key, as you do not want to gift what you can’t afford and be left in a position where you don’t have enough for your own retirement. So make sure you only gift a sensible amount to maintain your own financial security and standard of living.
“This strategy isn’t just about tax. It’s about sharing what you have built across your lifetime and who gets to benefit from it. Whether it’s helping children or grandchildren buy a home, or just knowing the people you love are looked after.
“April 2027 is not far away and some of this planning takes time to put in place properly, so reach out to an FCA-regulated adviser to discuss how this strategy could help you and your family.”
