Rethinking Pensions: Retirement Income and Estate Planning in a New Reality - Susie Hillier
For over a decade, pensions have occupied a uniquely favourable position in financial planning. They have provided tax-efficient retirement income and, importantly, a highly effective way of passing wealth to the next generation. Following HMRC’s recent technical note, it is now clear that from April 2027 pension funds will be brought within the scope of Inheritance Tax (IHT). While some had hoped this change might be softened or delayed, the policy has now been confirmed, with the forthcoming changes representing a structural shift rather than a technical adjustment.
Why pensions may no longer be the most efficient wealth transfer tool
Where death occurs after April 2027, pension funds may be subject to IHT although the spousal exemption will continue to apply where benefits are left to a spouse or civil partner. The income tax position depends on the age at death. Where death occurs before age 75, some or all of the benefits can generally be paid without income tax. However, where death occurs after age 75, income tax is applied in the hands of beneficiaries when benefits are drawn, creating a potential double layer of taxation.
This treatment is not unique to pensions, and similar tax outcomes can arise in other structures such as investment bonds or retained buy-to-let property. However, the position differs for other commonly used planning vehicles such as ISAs that are generally subject to IHT only, with no further income tax on access. This distinction means that, in some cases, pension wealth may now be comparatively less efficient to pass on than other assets.
Rethinking the “pensions last” approach
Many clients have adopted a “pensions last” strategy, preserving pension funds and drawing instead from unwrapped portfolios or ISAs, often with the intention of passing pension wealth intact to the next generation. In the new regime, this approach may no longer be optimal, particularly where pension funds are left untouched and could ultimately be exposed to both IHT and income tax.
By contrast, drawing from pensions earlier may reduce the taxable estate and allow other assets to be preserved or passed on more efficiently, depending on the client’s wider objectives and tax position. For some clients, this may support a more active use of pension income during retirement, while for others a blended approach across different asset types can help manage income tax during lifetime alongside longer-term estate planning objectives. The key shift is one of mindset, as pensions should no longer be seen simply as assets to preserve, but as tools to be used deliberately.
Planning considerations and practical implications
The confirmed changes also bring greater focus to practical planning considerations, particularly around liquidity and administration at death, where executors may face a six-month deadline to pay IHT even where delays in obtaining pension valuations or information are outside their control. Where a significant proportion of wealth sits within pensions, this can create timing pressure and additional complexity for personal representatives and beneficiaries.
Forward planning can help mitigate this risk, including ensuring sufficient accessible assets within the estate, reviewing beneficiary nominations, and understanding how death benefits will be paid and administered. At the same time, pensions remain highly tax-efficient during lifetime and, when used thoughtfully, can support wider planning objectives such as meeting expenditure or facilitating lifetime gifting where appropriate.
Where appropriate, this may also involve using pension withdrawals to fund alternative structures, including life assurance or assets that may benefit from different tax treatment.
A shift that will drive planning conversations
Perhaps the most important takeaway is that this change is now certain, and as a result we expect pension strategy and estate planning to become a key focus of client reviews over the coming year as advisers and clients reassess existing plans. Plans that were entirely appropriate under the previous regime may still be suitable, but they should be revisited considering a different legislative backdrop and evolving planning considerations.
This includes considering whether holding significant wealth within pensions remains appropriate or whether alternative structures and strategies may better align with long-term objectives, tax efficiency and family outcomes.
Looking ahead
The role of pensions in financial planning is therefore evolving, with the focus shifting from preserving pension wealth at all costs towards using it more actively and intentionally as part of a broader strategy. With careful planning, pensions can continue to support both retirement income and intergenerational wealth transfer, but achieving this will increasingly require a balanced approach across different assets, thoughtful use of withdrawals and regular review as the rules continue to develop.
Photo by Igor Sporynin on Unsplash
Disclaimer: Issued by Stonehage Fleming Wealth Planning Limited (SFWP). Authorised and regulated in the United Kingdom by the Financial Conduct Authority (FRN. 562235). SFWP does not provide tax, legal or accounting advice and specific advice should be sought before entering into any investments, structures or planning where appropriate. The products, services, information and/or materials contained herein may not be available for residents of certain jurisdictions.