Four ways to protect your pension from inheritance tax

Attivo Pension Series – Part 3

What if your inheritance tax (IHT) bill looks set to increase exponentially because of the impending April 2027 changes? What can be done to safeguard your hard-earned pension? Ryan Wright, Associate Director at Attivo, answers these very questions in the final part of our Pension series. 

Words by Sophie Marie Atkinson

As of April 2027, any unused pension funds will be included in the value of your estate for IHT.

Thankfully, there are several financial planning strategies you can implement to reduce this impact and save as much of your hard-earned money as possible:

1. Spend your pension (and enjoy it).

Ryan explains that spending is the perfect tonic to IHT.

“If we can show, in various circumstances and stress tests, that clients don’t need it and that they’re never going to need it, then they can spend their pension and really enjoy it.”

“We see too many people stockpiling cash,” he continues. “This was their long-term plan, but it’s often very short-sighted and can have substantial tax implications.”

2. Make the most of life cover

Another strategy suggested by Lifestyle Financial Planners is life cover – monthly premiums that you pay in exchange for a lump sum when you pass away, which can cover at least part of your IHT bill.

“Life insurance is a very logical route for the vast majority of clients,” says Ryan, “but one that is often neglected. Part of the reason is that it only really makes sense if you truly understand it.”

The key to getting your head around this kind of cover is to think about it as a savings policy that goes towards your IHT bill, as opposed to an insurance one. You might pay high monthly premiums, but the return rates often make them worthwhile.

“Life insurance gets put off by a lot of people – sometimes for years,” says Ryan. “But it’s so vital that you apply when you’re in peak health. When this is no longer the case, you may lose this option, limiting the ways that you can raise money for IHT.”

“There are what’s known as loaded premiums, and some critical illnesses are covered,” continues Ryan. “For example, I have a client with Parkinson’s disease who has life insurance. Because of their health and other risk factors, an additional amount is added to their premiums. It’s an option I advise almost everyone to explore if they can.”

Ryan is referring to the fact that pensions generally grow free of tax, unlike income from interest and dividends. With ISAs, the current contribution limit is £20,000 a year before paying tax, whereas with pensions, this limit is either 100% of your salary, or £60,000 (whichever is lowest).

A lifetime allowance used to exist for pensions but was scrapped in April 2024 and – despite rumours – has not been reinstated.

This was a limit on how much individuals could build up across their pension pots before paying a tax charge, and during its existence, the limit ranged from £1 million to £1.8 million.

3. Explore pension nominations

Ryan suggests another option, which is to try to take advantage of the next year, when pensions are not subject to IHT.

“If your spouse or civil partner isn’t going to need your pension and plans to hold on to it until their death, it will pass to your children upon the second parent’s death and will be subject to 40% IHT,” he explains.

“In this case, it’s much more sensible to show clients that their spouse doesn’t need the pension, and instead to encourage them to nominate the fund to the children in question upon death.”

4. Consider the gifting route

One final, altruistic option is to give everything away. Generally, no tax is due on gifts if you survive for seven years after giving them.

However, the problem for many here is that they’re letting go of their retirement nest egg.

“In this situation, you need an adviser who can accurately assess what you can afford to part with,” says Ryan. “They need to provide hard facts and data. And it takes meticulous planning to settle on a figure.”

Several annual tax-free gifts are available, separate from and in addition to the seven-year IHT regulations. These include gifts of up to £250 per person each year, wedding gifts and surplus income gifting. As with a lot of tax planning, the rules here can be complicated, so seeking advice is sensible.

Be sure to plan for your pension carefully

In times of change and uncertainty, especially around legislation, people often react impulsively. Between now and 2027, this may influence where and to whom pensions are transferred.

People understandably want to protect their wealth. They don’t want to lose it, especially to HMRC. This may tempt them to change their wills, wishes or named beneficiaries.

Be sure to take your time when planning around your pension and seek financial advice from an expert where possible.

Plan for your pension with confidence

“Pensions is such a complex and uncertain area,” notes Ryan. “The Government is still deciding exactly how IHT on pension plans will work. I recently sat around a table with fellow chartered planners, and we discussed different ways to navigate these changes.

“We’re here to guide our clients through these changes,” he adds, “but we also help them plan their financial futures so they can enjoy their lives. Sadly, we see too many people holding onto their money for too long, sometimes dying with it, and missing out on the opportunity to enjoy it or see loved ones do so.”

“The key issue here is confidence. People need to be confident that they’re in a safe enough position to spend or give away their money. That’s where planners like me come in.”

Take your pension planning further with Attivo

At Attivo, our goal is to align your financial objectives with your lifestyle aspirations, ensuring that when you decide to retire, you can enjoy the life you choose to the max.

Our free, no-obligation consultation is a great place to start discussing your pension plans and see how you can set them in motion with the support of one of our Lifestyle Financial Planners.

This article is provided for information purposes only and does not constitute a personal recommendation. Any decision to invest should be made in the context of your individual circumstances and financial objectives. The value of investments and any income from them can fall as well as rise, and you may get back less than you invest. Tax treatment depends on individual circumstances and may be subject to change in the future. Tax planning is not an activity which is regulated by the Financial Conduct Authority.