If you've listened to the news recently, chances are you've seen the headlines. Pension inheritance tax is everywhere right now, with proposed rule changes meaning many families could face a bigger tax bill from April 2027.
So, what does this mean? Essentially, unused pension funds and death benefits would become part of your estate for Inheritance Tax (IHT). While that sounds daunting, there's no need to panic. There is still time to put a plan in place.
We spoke to the financial advisers and pension experts at Edinburgh-based Melville Independent, who shared five practical ways to help protect your pension, reduce your family's tax bill and make the most of the options available.
1. Don't leave your pension on autopilot
“For years, leaving pensions untouched was an effective strategy. However, upcoming rule changes mean you may want to consider your other options,” says Alex Bruce, a Chartered Financial Planner at Melville Independent.
“You can usually withdraw up to 25% of your pension tax-free. From 2027, withdrawing tax-free cash during your lifetime to help children buy their first home, fund grandchildren’s education, or place into a trust can save your family significantly more tax than leaving it in your pension.”
A financial review ensures your pension withdrawals and overall estate plan work together smoothly.”
2. Make the most of gifting rules
Passing money to your loved ones during your lifetime can be tax-efficient, with careful planning. You could consider:
- Larger Gifts (The 7-Year Rule): Any larger sums fall completely outside your taxable estate as long as you live for 7 years after giving the money.
- Annual Gift Limits: You can give away up to £3,000 each tax year tax-free, plus small extra gifts of up to £250 per person.
- Gifting Surplus Income: You can also make regular gifts out of your surplus income completely free of IHT, provided it doesn't reduce your standard of living.
3. Check your pension beneficiaries
“When did you last update your pension nomination form? If it's been a while, now's a good time to make sure your money will go to the people you intend.”
“Most pensions aren't covered by your Will. Instead, pension providers rely on an Expression of Wish form to know who should receive your pot.”
“Under the 2027 rules, leaving unused pension funds to a married spouse or civil partner will generally remain tax-free for IHT. Keeping this form updated ensures your wishes are clear and prevents your money from going to the wrong person.”
4. Rethink where your retirement income comes from
“In the past, it made sense to spend your cash and investments first and leave your pension untouched so it could pass to your family tax-efficiently.”
“From 2027, it could be smarter to draw an income from your pension, making use of your yearly tax-free allowance while saving your other assets to pass on to loved ones.”
5. Review your assets and plan ahead
“The rules aren't changing until 2027, so there's time to put a plan in place. A financial plan could make a real difference to your family's future wealth.
“Reviewing your pensions, property, savings, and legal documents together ensures your overall plan is tax-efficient, and that your money goes where you want it.”
The bottom line is that the headlines can sound scary, but they don't have to be. A simple review with a financial adviser can help you understand what the proposed changes could mean for you and whether there are opportunities to reduce a future inheritance tax bill.
Melville Independent are a Scottish-based company offering independent financial advice. They’ve been helping people with wealth management advice for more than 10 years from their city centre offices on Melville Street Edinburgh.
egg is delighted to be partnering with Melville Independent for another year and sharing their expertise with our community.
If you'd like a financial audit, call 0131 260 2760 or send an email to [email protected].
