For many years, pensions have sat quietly in the background of estate planning. Most people knew that their pension was usually outside the scope of inheritance tax, so it was common to spend other savings first and leave the pension untouched as a tax efficient way of passing wealth to the next generation. That position is about to change.
From 6th April 2027, most unused pension funds and pension death benefits will be brought into the value of a person's estate for inheritance tax purposes. For families across Blackpool and the Fylde Coast, this is one of the most significant changes to estate planning in a generation. It affects not only how much tax may be payable but also who is responsible for paying it and how long it takes to administer an estate.
At Blackhurst Budd, our wills and probate team has been helping local families plan for the future for 150 years. In this article we explain what is changing, who is likely to be affected and the practical steps you can take now, while there is still time to plan.
What is changing?
Under the current rules, most defined contribution pensions are not counted as part of your estate when inheritance tax is calculated. If you die with money left in your pension, it can usually be passed to your chosen beneficiaries without inheritance tax being charged on it.
For deaths on or after 6th April 2027, that will no longer be the case. Unused pension funds, including undrawn pension pots, drawdown funds and most lump sum death benefits, will be added to the value of the rest of your estate. Inheritance tax will then be calculated on the combined total.
There are some important exceptions. Death in service benefits paid from a registered pension scheme will remain outside the scope of inheritance tax. Pensions left to a spouse or civil partner will continue to benefit from the spouse exemption, so no inheritance tax will be due on that transfer. Charitable gifts will also remain exempt.
Where a death happens before 6th April 2027, the existing rules will continue to apply.
Who is likely to be affected?
Inheritance tax is currently charged at 40 percent on the value of an estate above the available tax free allowances. Every individual has a nil rate band of £325,000. Where a home is left to children or grandchildren, an additional residence nil rate band of up to £175,000 may also be available. Married couples and civil partners can usually pass any unused allowances to the surviving spouse, meaning a couple may be able to leave up to £1 million free of inheritance tax.
Many people on the Fylde Coast assume that their estate falls comfortably within those limits. Once a pension is added, however, the picture can look very different. Someone with a home worth £300,000, savings of £100,000 and a pension pot of £250,000 would previously have been assessed on an estate of £400,000. From April 2027, the same estate would be valued at £650,000.
There is a further point that catches many people out. The residence nil rate band begins to reduce once an estate is worth more than £2 million, falling by £1 for every £2 over that threshold. Adding a substantial pension to an estate could push it over that figure and reduce or remove an allowance the family had been relying on.
Government estimates suggest that most estates will still have no inheritance tax to pay. However, thousands of families who would not previously have paid inheritance tax will now face a bill and many more will pay more than they would have done under the current rules.
A new burden for executors
The changes do not only affect the amount of tax. They also change who must deal with it.
Under the new rules, the personal representatives of the estate, usually the executors named in the will, will be responsible for reporting and paying any inheritance tax due on pension funds. This is the case even though the pension does not pass under the will and the executors have no control over who receives it. The decision on who inherits a pension is usually made by the pension scheme, guided by any expression of wish form the member has completed.
In practice, executors will need to identify every pension the person held, contact each scheme administrator, obtain valuations, include those figures in the inheritance tax account and arrange for any tax due to be paid. Inheritance tax is normally due six months after the end of the month in which the person died, with interest charged on late payment. Gathering pension information within that timescale can be challenging, particularly where someone held several old workplace pensions from different employers.
To help with this, pension schemes will be able to pay inheritance tax directly to HMRC on request and executors will be able to ask schemes to hold back part of the benefits until the tax position is settled. Even so, the process will add time, complexity and responsibility to the administration of many estates.
For people who act as executors for a parent or relative, this is an important point to understand. Being an executor is already a significant role. From April 2027, it will carry additional duties and potential personal liability, which is why professional support from a probate solicitor is likely to become even more valuable.
Steps you can take now
The good news is that there is still time to plan. With careful advice, many families will be able to reduce the impact of these changes or at least make sure their executors are well prepared. We recommend considering the following.
Review your will. If your will was written some years ago, it may have been drafted on the assumption that your pension would sit outside your estate. It is worth checking that your will still reflects your wishes and makes the best use of the allowances available.
Check your expression of wish forms. Your pension does not pass under your will, so the expression of wish form you have given to each scheme is very important. Many people completed these forms when they joined a scheme and have never looked at them again. Make sure they are up to date and consistent with the rest of your estate plan.
Keep a clear record of your pensions. One of the most practical things you can do is to keep an organised list of every pension you hold, together with the scheme name, policy number and contact details. This will save your executors a great deal of time and stress.
Consider lifetime gifts. Gifts made during your lifetime can reduce the value of your estate. Some gifts are exempt straight away, while others fall outside your estate if you survive for seven years. Regular gifts made from surplus income can also be exempt. Advice is essential here, as the rules are detailed and a gift should never leave you short of the income you need.
Think about how the tax will be paid. If a large part of your wealth is held in a pension and property, your executors may find it difficult to raise the funds to pay inheritance tax within the deadline. Planning ahead can help avoid the need to sell a family home in a hurry.
Speak to your financial adviser as well as your solicitor. Pension and investment decisions sit alongside legal planning. The best outcomes usually come from your solicitor and financial adviser working together.
How Blackhurst Budd can help
Our wills and probate team advises clients across Blackpool, Lytham St Annes, Poulton le Fylde, Thornton Cleveleys and the wider Fylde Coast. We can review your existing will, explain how the April 2027 changes may affect your estate and help you put a clear plan in place for the people you care about.
We also act for executors who need help administering an estate. If you have been named as an executor, or you are dealing with the estate of someone who has died, we can guide you through every stage, including the new reporting duties for pensions once they come into force.
For 150 years, Blackhurst Budd has helped the people of Blackpool protect what matters most to them. If you would like to talk about your will or the effect of the pension changes on your family, please get in touch with our wills and probate team today.
Call 01253 629300 or email info@blackhurstbudd.co.uk to make an appointment.
This article is for general information only and does not constitute legal or financial advice. You should take advice on your own circumstances before acting.