Pension last? – Is that strategy about to change?
For years, the simple rule of thumb for many people has been – spend your other assets first and leave your pension until last. Why? Well, under the current rules, most pension funds sit outside your estate for IHT purposes. This can make them an attractive asset to preserve for later life and potentially for the next generation. From April 2027, that picture changes.
A refresh – what happens from 6 April 2027?
From April, unused pension funds will generally be included when calculating the value of your estate for IHT purposes.
In simple terms, if you die with money still sitting in your pension, that unused amount could form part of your estate for IHT. Where IHT is due, the relevant portion could therefore be taxed at 40%. There are important exemptions and rules to consider, including transfers to a spouse or civil partner, so the impact will vary considerably from person to person.
Does that mean you should spend your pension now?
Not necessarily. And this is perhaps the most important point. The answer isn’t simply ‘spend your pension first.’ Your pension is there to support your retirement, and taking money out purely to avoid a potential future tax charge could create other tax or financial consequences.
Instead, it’s about looking at where your income should come from, when you should take it, and which assets you should preserve. For some people, the new rules could mean changing the traditional ‘pension last’ approach. Drawing more from a pension during retirement, while retaining other assets such as ISAs or investments could potentially produce a more efficient outcome for both your lifestyle and your estate.
Will the changes affect you?
That depends on your circumstances. It’s particularly worth reviewing your position if you have a sizeable pension, other assets that could already bring your estate close to the IHT threshold, or you’ve been deliberately preserving your pension as part of your legacy plans.
Don’t forget the basics
Your expression of wish should be up to date; this is more important than ever. Clear, current nominations help your beneficiaries and executors avoid uncertainty or delays. Your wider estate and gifting plans will also be worth revisiting.
Six months to go – what should you do?
There’s no need to panic or make rushed decisions, but there is a good reason to review your plan now.
Drawing from the right place at the right time is becoming increasingly important
Your Finli Planner can help you look at the bigger picture – including your pension, ISAs, investments, property and other assets, and model how the upcoming changes could affect both your retirement and the wealth you hope to pass on.
Six months might sound like plenty of time but when it comes to making considered financial decisions, now is a good time to start the conversation. If you’re ready to review your financial plan, please speak to your Finli Planner.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. The Financial Conduct Authority does not regulate Will writing, tax and trust advice and certain forms of estate planning. Gifting and trust strategies can have tax implications and may not be suitable for everyone.
