Pensions and inheritance tax. Why the new rules could create more than a tax bill

From April 2027, unused defined contribution pension assets are expected to become subject to inheritance tax, representing one of the most significant changes to pension planning in recent years.

While much of the discussion has focused on the potential tax cost, many people may be overlooking a more immediate concern: the practical challenges these changes could create for those responsible for administering their estate.

For some, the biggest issue may not be the tax itself, but the complexity left behind for the people they care about most.

The new rules mean that the people responsible for administering your estate (often a spouse, child, relative or close friend) may need to obtain information from pension providers, establish pension values and ensure any inheritance tax liabilities are settled within existing deadlines.

For many people, the key question is no longer simply how much inheritance tax may be payable, but how these changes affect their wider plans for retirement, gifting and passing wealth to future generations.

As you move between employers throughout your career, it is increasingly common to accumulate multiple pension arrangements.

While this may not create significant issues during your lifetime, it can create additional work when an estate needs to be administered.

Those responsible for winding up an estate may need to contact multiple providers, establish current values, confirm beneficiary information and gather information required for inheritance tax and probate purposes.

This means the forthcoming changes provide another reason to review how your pension arrangements are organised and documented.

The forthcoming changes also provide a useful opportunity to review pension beneficiary nominations. A beneficiary nomination allows you to tell your pension provider who you would like to receive any remaining pension benefits when you die.

While beneficiary nominations do not generally determine whether inheritance tax is payable, they can help pension providers understand who you would like to receive pension benefits and may help reduce delays when benefits are distributed.

Outdated nominations are particularly common where there have been significant life events such as marriage, divorce, bereavement or the birth of children and grandchildren.

Reviewing these nominations regularly can help ensure pension benefits are distributed in line with your wishes and reduce uncertainty for those administering your estate.

For some people, pension consolidation may help simplify retirement planning and make life easier for those administering an estate.

Having fewer pension arrangements can make it easier to:

• Keep track of retirement savings

• Maintain accurate records

• Review beneficiary nominations

• Provide a clearer picture for personal representatives administering an estate

• Monitor investment performance and risk

However, consolidation is not always appropriate.

Some older pension arrangements contain valuable guarantees, safeguarded benefits, protected tax-free cash entitlements or favourable death benefits that could be lost if transferred.

Similarly, some arrangements may impose exit penalties or provide benefits that would be difficult to replicate elsewhere.

While administrative simplicity is one consideration, consolidation decisions should also be assessed alongside retirement objectives, investment strategy and estate planning considerations.

Historically, many people sought to preserve pension wealth for as long as possible while drawing on other assets first in retirement.

As pensions become more exposed to inheritance tax, people are increasingly reviewing how pensions fit alongside their wider assets, retirement income needs and plans for supporting future generations.

There is rarely a single right answer.

The appropriate approach for you will depend on several factors, including:

• Retirement income needs

• Other available assets

• Family circumstances

• Your tax position

• Long-term objectives

Ultimately, the objective is not simply to reduce tax. It is to ensure your wealth can be passed on efficiently, support future generations and minimise unnecessary complexity for those left behind. The new pension rules provide an opportunity to review not only how your pension assets are invested and structured, but also how they fit within a broader plan for passing wealth on with confidence.

The sooner those conversations begin, the more options are likely to be available.

To find out more, speak to your usual Evelyn Partners contact or book an appointment online.