Inheritance tax and pensions: what should we be doing now?

We know that inheritance tax is going to potentially apply to unused pension funds and death benefits for any deaths after 6 April 2027. But is there anything we can be doing now to help reduce the tax that will be payable when someone dies after April? 

Inheritance tax applying to pensions is a significant change.  There are ways to reduce the impact of the tax or make the process easier and these can be considered now rather than waiting until after April 2027. 

Expression of wish forms 

The spouse exemption will apply to pension funds left to a spouse or civil partner.  So where children have been named on expression of wish forms previously, it might be worthwhile considering a spouse or civil partner instead if inheritance tax would apply otherwise. It's always good practice to ensure expression of wish forms reflect the current wishes.  The discretionary process providers follow to establish who to pay death benefits to will continue after April 2027. 

Making use of the available exemptions 

If a gift is exempt, it means inheritance tax won't apply regardless of when your client dies. So using surplus pension funds to make gifts during their lifetime could reduce the inheritance tax bill. The main exemptions are the annual exemption of £3,000, gifts of up to £250 to any number of people, regular gifts out of surplus income and gifts to charities.  

Any regular gifts from surplus income if they're to be exempt, need to be from surplus income and not capital.  They need to form part of a normal expenditure.  In other words form part of a series or pattern of regular gifts. Finally, these gifts must not impact their normal standard of living.  

If your clients make a gift which doesn't come under any of the exemptions and survive for seven years after making the gift, it will also not be included in their estate.  

It's always recommended to keep records of any gifts made if any of the exemptions are being claimed after death. 

Joint life annuities 

If your clients are living as a couple but aren’t married or in a civil partnership, a joint life annuity might be worth considering.  This is because inheritance tax won’t apply to the survivor’s benefit.  Most annuity providers will offer joint life annuities if a couple are financially dependent on each other.  A joint life annuity could be considered for part of a fund if full annuitisation isn't suitable.

Protection policies   

Whilst it doesn’t save inheritance tax, a life insurance policy written in trust can provide funds to cover the inheritance tax bill, ensuring the surviving partner isn't forced to sell a home or other assets to pay the tax bill.  Writing the plan in trust will mean funds are available soon after death rather than needing to wait for probate or confirmation. 

Getting married 

Whilst this won't suit everyone, it could be beneficial from an inheritance tax perspective. 

Are there any pension benefits inheritance tax won’t apply to? 

We already mentioned joint life annuities, but there are other pension death benefits which won’t be included in the estate for inheritance tax purposes. Death in service lump sums won't be included.  Any charity lump sum death benefits will also not be included. Any dependant’s scheme pensions from either defined contribution or defined benefit schemes won't be included.  If these pensions are commuted on triviality grounds the same treatment applies. 

Building relationships 

The personal representatives will be liable for reporting and paying any inheritance tax due on unused pension funds and death benefits.  Along with the beneficiaries, personal representatives are likely to need help when deciding how to pay an inheritance tax charge.  Personal representatives could also need help when dealing with pension providers to inform them of the death or establishing values.  So building relationships with the member’s beneficiaries and personal representatives will be helpful. 

As we said at the beginning, inheritance tax applying to pensions is a significant change and those with pensions, their beneficiaries and their personal representatives will be looking for help to guide them through ways to navigate this change.