Inheritance Tax Planning and Pensions: Do I need to review my Will?
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Inheritance Tax Planning and Pensions: Do I need to review my Will?
Ian Winterbotham discusses the importance of reviewing your Will following the new pension inheritance tax rules. Podcast recorded in May 2026.What are the rules around pensions and inheritance tax?
Pensions are being brought into the scope of inheritance tax from April 6, 2027, where pension savings will be included as part of an individual’s taxable estate.
Previously, any unspent pensions could be passed on tax-free – and they still can be to spouses. But from April 2027, pension savings could be liable for a 40% tax charge.
Do I need to review my Will?
For many people, the answer will be yes, but it’s important to understand that pensions will still be administered by the pension trustees and won’t be part of your estate when you die.
Even though the pension could be taxed, pension funds are not distributed via the Will – but this doesn’t mean you don’t need to review it.
Many Wills create Trusts, for instance, and some Trusts could make it impossible or very difficult for the executors to claim the additional tax allowances introduced by George Osborne, known as the residence nil rate band allowances.
Ultimately, if they’re not able to claim those for mum and dad, it could cost the children up to £140,000 in unnecessary tax.
No action is needed if you judge that your estate is not and never will be over the inheritance tax threshold of £325,000 per person – or £650,000 for the joint estate of a married couple or civil partnership.
But it’s important to review Wills regularly, especially if you own a property and have assets above the inheritance tax thresholds. It may also be important to talk to an IFA (Independent Financial Advisor) about your pensions and the options available to you – and combine the two reviews.
How can I use my pension to reduce my inheritance tax bill?
We’ve gone through that in the previous podcast. If you’re married or in a civil partnership, you could leave all your pension benefits to your spouse.
Your spouse can then gift the assets to the children or other beneficiaries. The surviving spouse would need to live for seven years from the date of gift to save all of the tax. It’s not a 100% certain plan, but it is a possible way of saving tax for the children.
What about the money I take out of my pension?
You can take 25% out of a self invested personal pension (SIPP) tax free. Any further drawdown of funds will be taxed at your marginal income tax rate.
How can I protect my inheritance tax position if I take money out of my pension?
Let’s say you’ve taken your tax fee lump sum. You can then gift it to your children or other beneficiaries, and if you survive seven years from the date of the gift, then the gift will no longer be taxable. You’ve therefore reduced the danger of inheritance tax being payable on your pension fund.
Why is it important then to nominate beneficiaries to my pension?
This has become more of an issue. In the past, when people set up a pension, they wanted everything to go to their spouse and then their children. If they weren’t married, they needed to think about who to pass it to.
If you’re now trying to do things in the most efficient way to save inheritance tax, these decisions can become more subtle. It’s important to make your wishes clear to the pension trustees, otherwise they may prevaricate, and delay the distribution of the funds post death.
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What are the consequences of not nominating beneficiaries?
Pension trustees will need to judge who should receive the benefits. They may ask for a copy of your Will to see who you’ve left it to, but they also have discretion. They normally do things in line with intestacy rules, and give it to the spouse – and then to the children if the spouse is not around.
In some circumstances, this won’t necessarily be the most tax-efficient distribution – such as if the spouse were critically ill, for example. Remember that the pension trustees will look at your nominations before distributing the funds.
How often should I review my pension nominations?
This should be driven by life events. It’s different from other planning, but as I’ve mentioned, what would happen if a family member becomes critically ill? You can’t rely on the seven year gift clock if your spouse is unwell.
Other times to review the nominations might be more obvious, like on getting married or entering a civil partnership. Divorce and separation can also raise these issues, especially if you’re going through mediation or through a solicitor.
The birth or adoption of a child is another clear one. Let’s say you’ve nominated somebody and they die – you would need to review at this point, and also when children reach adulthood. You probably still want your assets to go to the children, but it’s worth reviewing what you said previously.
If you gain a new long-term partner, that needs careful consideration. They may have rights to claim against your estate, but not necessarily against your pension. It’s really important to make it clear to the trustees that you want your money to go to your children rather than your partner, if that’s the case.
Buying a home or changing your estate planning strategy could also be a reason for reviewing your pension nominees.
If you own Lifetime Trusts and you’re setting up or winding down a Trust, that should be done in conjunction with estate planning, with an IFA and your Will planner, as well as reviewing the nominees in your pension.
If your pension value rises greatly, you might think about whether it’s better to bypass a generation and leave the benefits not just to your children but to your grandchildren. We’ve talked about this already, but when you take the tax-free lump sum and move that into drawdown is an obvious time to review these nominations.
We’ve covered a lot there – is there anything else we need to know?
Anybody who has a Lifetime Trust and is not confident that it will be flexible enough to allow the children to claim the residence nil rate band allowances, should review these Trusts as a matter of importance.
Lifetime Trusts can cause the loss of inheritance tax allowances – and little can be done to remedy this after someone’s died. The new pension rules could affect quite a lot of people who’ve taken the trouble to take out Lifetime Trusts because of their existing assets.
Careful planning during your lifetime can ensure that your children can benefit from all the available allowances, but they can all too easily be lost. It’s worth reviewing a Lifetime Trust now, before it’s too late.
We’ve explained how the new inheritance tax changes to pensions could affect you, and how to minimise a potential inheritance tax bill, in our previous podcast on IHT and pensions. These two podcasts go together, so if you haven’t listened to that, please do.
Key Takeaways:
- From April 2027, pension savings will be included as part of an individual’s taxable estate and could be subject to a 40% inheritance tax charge.
- Reviewing your Will is important, even though pensions are administered by trustees, because certain Trusts created within your Will could prevent executors from claiming valuable inheritance tax allowances.
- You should review your estate planning, potentially in conjunction with an IFA, if you own a property and your assets are above the inheritance tax threshold of £325,000 per person (£650,000 for a married couple or civil partnership).
- It is critical to nominate beneficiaries to your pension and make your wishes clear to the pension trustees, as this ensures the most tax-efficient distribution and avoids potential delays after death.
- Pension nominations should be reviewed following major life events such as getting married, divorce, the birth or adoption of a child, or if a family member becomes critically ill.
For specialist tax advice, please refer to an accountant or tax specialist.