Thousands of UK households are reassessing their pension and estate planning strategies ahead of a significant HMRC rule change. From April 2027, proposed plans could see pensions lose their inheritance tax (IHT) exemption.
Experts at Spencer Churchill Claims Advice have raised concerns about uncertainty over how the new tax rules will be applied, as many people take pre-emptive steps to reduce their tax burden.
New research shows that more than half of Britons consider their pension a key element of their estate planning, while 23% say it plays a lesser role.
However, experts warn that hasty decisions, such as withdrawing large sums from pension pots, could lead to costly mistakes.
A spokesperson from Spencer Churchill said: “Many people are understandably worried about how inheritance tax on pensions will be implemented, and some are looking to access their funds early before the changes take effect. While this might seem sensible, it could trigger unintended financial consequences, such as higher income tax bills and reduced pension security in later life.”
Withdrawing a large lump sum could push retirees into a higher tax bracket, leading to an unnecessary tax hit. At the same time, drawing down too much too soon risks depleting savings, leaving people struggling to fund their later years.
Plan now to avoid unnecessary inheritance tax
The changes to inheritance tax on pensions are expected to raise an additional £2.5billion for HMRC by 2029/30 as part of the Government’s effort to bolster public finances.
Spencer Churchill urged pensioners to take a measured approach. It said: “A knee-jerk reaction to changing pension rules could do more harm than good.
“Instead of making hasty withdrawals, households should carefully plan their estate strategy to reduce inheritance tax liability while ensuring they retain enough pension savings for retirement.”
What should pension savers consider before making changes?
Ahead of the planned rule change, Spencer Churchill suggested UK pensioners should review their retirement plans and consider several key factors.
First, tax efficiency is important, as large withdrawals could push people into a higher tax bracket, leading to higher income tax. Regarding estate planning, gifting pension savings may be an option, but strict rules apply, including a seven-year rule for tax exemptions.
Spencer Churchill also highlighted alternative solutions, such as trusts and tax-efficient investments, which may offer better options for inheritance planning.
Additionally, seeking professional advice from a financial planner can help pensioners adopt the most tax-efficient approach without jeopardising their future income.
The spokesperson added: “As the 2027 deadline approaches, pension holders [are urged] to take action now to ensure they maximise their retirement savings while mitigating unnecessary tax costs.”
