For many people, their pension is the single biggest financial asset they will ever build. It represents decades of hard work, careful saving, and a cornerstone of financial independence in retirement. Increasingly, pensions are also viewed as a way to provide for the next generation, often forming a key part of estate and legacy planning.
However, recent announcements mean the way pensions are treated for tax purposes is set to change. Understanding these changes—and how they affect you—is essential if you want to protect both your retirement lifestyle and the inheritance you hope to leave behind.
At Blacktower, we know that financial planning can sometimes feel complicated, particularly when governments adjust the rules. That is why we are here: to help you stay informed, adapt to new legislation, and remain in control of your financial future.
What Has Changed?
Under the previous Conservative government, the Lifetime Allowance (LTA) was removed. For years, the LTA acted as a cap on how much you could build up in your pension while retaining tax advantages. If you exceeded the allowance, you faced a significant tax charge. Its removal was welcomed by many savers, particularly those with larger pension pots, as it allowed more freedom to save and grow retirement funds.
The current Labour government, however, has announced a major new reform:
👉 From April 2027, most unused pension assets will be brought into your estate for inheritance tax (IHT) purposes if they are passed to anyone other than a spouse or civil partner.
This marks a significant departure from the previous position, where pensions could often be passed down free of IHT, making them one of the most efficient vehicles for legacy planning.
Why This Matters
The impact of this reform could be profound. For many families, pensions are no longer just retirement income—they are a vital part of wealth transfer. If pensions become subject to IHT, this could substantially reduce the amount beneficiaries receive.
Here are some of the ways the changes may affect you:
- Size of inheritance: The value of pension funds passed on could be reduced by IHT, potentially at 40%.
- Beneficiary choice: Non-spouse beneficiaries (such as adult children or grandchildren) may see their inheritance reduced.
- Retirement planning: Decisions about how and when to draw down pensions could change.
- Estate complexity: Larger estates may require more sophisticated planning to mitigate tax exposure.
For those who have diligently saved, this shift underlines the importance of regularly reviewing both pension arrangements and wider estate plans.
What You Can Do Now
While the changes are not due until 2027, acting early is vital. Here are four key steps you can take:
1. Review Your Pension Arrangements
Check whether your current pension setup still reflects your retirement goals and family needs. With pensions forming a growing share of estates, strategies may need adjusting to keep inheritance objectives on track.
2. Consider Your Beneficiaries
Think carefully about who you would like to inherit your pension. Under the new rules, the difference between leaving your pension to a spouse or to children could be significant in tax terms.
3. Plan for Inheritance Tax
There are strategies available to reduce IHT exposure. These could include gifting assets during your lifetime, using trusts, or rebalancing between pensions, ISAs, and other investments. Professional guidance can ensure your strategy is effective and compliant.
4. Stay Informed
Tax rules can and do change. Keeping up to date with developments—and regularly reviewing your financial plan—will help you remain in control and avoid unwelcome surprises.
Overseas Pensions and QROPS
For those with pensions overseas, such as a Qualifying Recognised Overseas Pension Scheme (QROPS), the picture can be even more complex. QROPS were designed to provide flexibility for expatriates, but UK legislation still has a bearing on their tax treatment.
From 2027, IHT changes may extend to these pensions too. If you hold overseas pensions, it is essential to review them alongside your UK pensions to ensure your overall estate plan remains sound, coordinated, and compliant across jurisdictions.
Frequently Asked Questions
1. Will my entire pension be taxed under the new rules?
Not necessarily. The changes apply to pension funds passed to beneficiaries other than a spouse or civil partner. The impact depends on your personal estate value and family arrangements.
2. Why was the Lifetime Allowance removed?
The LTA capped how much you could save into pensions tax-efficiently. Removing it gave savers more flexibility, but larger pension pots now face potential IHT liabilities in the future.
3. Can I avoid inheritance tax on my pension?
You may be able to reduce exposure using trusts, gifting strategies, or through careful beneficiary nominations. Professional advice is crucial here—one size does not fit all.
4. How will overseas pensions be affected?
QROPS and other overseas pensions are subject to varying rules, but UK IHT can still apply depending on your domicile status. Cross-border advice is strongly recommended.
5. Should I withdraw my pension early to avoid tax?
Not necessarily. Early withdrawals can trigger income tax, reduce retirement income, and may not achieve the desired outcome. Seek personalised advice before making any major decisions.
6. How often should I review my pension and estate plans?
At least annually, and certainly whenever legislation or your personal circumstances change.
Looking Ahead
The inclusion of pensions in the IHT net from 2027 represents one of the most significant changes to retirement and estate planning in recent years. While it may feel unsettling, it also presents an opportunity: those who plan ahead can protect their wealth, optimise their legacy, and avoid unnecessary tax burdens.
Financial planning is not static. By taking action now—whether by reviewing pension nominations, rebalancing investments, or exploring more advanced estate-planning tools—you can stay ahead of the curve.
We’re Here to Help
At Blacktower, our role is to simplify the complex and help you make confident financial decisions. Whether you are based in the UK, hold pensions overseas, or are considering cross-border estate planning, our advisers can provide the expertise and clarity you need.
If you would like to review your pension and estate plans, contact us today to arrange a consultation. Together, we can help you develop strategies designed to support your retirement and legacy goals in a tax-efficient way.
👉 Let’s secure your financial future—start planning today.
Disclaimer: This article is for general information only and does not constitute financial, tax, or legal advice. Tax and pension rules vary by jurisdiction and are subject to change. Past performance is not a reliable indicator of future results. Always seek personalised advice from a regulated financial adviser.
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This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
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