Why is this happening?
The government is concerned that pensions – because of tax relief on contributions and tax‑free growth – are increasingly being preserved as legacy assets rather than being used to fund retirement. When people don’t draw from their pensions, tax revenues fall. Bringing unused pension funds into the IHT system is intended to close this gap.
Unused pension funds could be taxed at 40% on death if the estate exceeds available IHT allowances. Funds transferred to a spouse or civil partner remain exempt, meaning this change will mainly affect families on the second partner's passing away. It represents a meaningful shift, but understanding it now gives you time to help clients prepare confidently.
What can you do to help your clients?
The best first step is to reassess the clients financial plan and their objectives.
1. Review their retirement income strategy
Many retirement plans have been built around preserving pensions for as long as possible. These new rules may change that balance. In some cases, drawing from pensions sooner and preserving more ISA or taxable assets for later life may create better outcomes – for both retirement income and any longer term plans.
2. Revisit expression of wish
With pension funds forming part of the taxable estate from 2027, keeping clients’ expression of wish up to date is more important than ever. Clear, current nominations help beneficiaries and executors avoid uncertainty or delays.
3. Re‑examine legacy plans
If your clients view their pension as a legacy pot, this change may prompt you to reconsider whether making withdrawals or lifetime gifts is more effective for them. Conversations about inheritance, financial preparedness or how younger generations may manage funds can be sensitive but including the family when having these conversations often leads to better outcomes.
What actions do clients need to take?
These changes may prompt clients to react but There’s no need to make rushed decisions. The most important step is to review the retirement plan together in light of the upcoming rules.
As financial advisers you can assess overall wealth including pensions, ISAs, investments, property, and life assurance – and how this change may affect your clients’ future. As your Discretionary Fund Management partner, we will work with you to model your clients potential IHT exposure, plan retirement income, and understand the most tax‑efficient way to pass on wealth. Drawing from the right place at the right time is increasingly important.
Retirement planning has never only been about numbers. It’s about lifestyle, family and the future you want to shape for your clients. With thoughtful preparation and the right guidance, you can help clients navigate this change with confidence and continue planning for what matters most.
