Pensions and IHT: Five Months to Check Your Nominations

Anyone hoping last week's Budget would bring a reprieve on pensions and inheritance tax has their answer. Chancellor John Healey left the plan in place, MoneySavingExpert's Budget analysis confirms, with about 10,000 extra estates expected to become liable in 2027/28. For deaths on or after 6 April 2027, most unused pension funds will count towards your estate, while the £325,000 nil-rate band stays frozen until 2031. With five months to go, the most useful thing many savers can do isn't complicated tax planning. It's finding an old form.

Who the Pension Inheritance Tax Change Will Affect

Most estates still won't pay inheritance tax. Those that do will now need to count pension wealth that was previously outside the calculation.

Take a divorced parent leaving a £400,000 estate, including their home, to their children, plus a £250,000 pension. Today, the estate falls within the combined £500,000 nil-rate and residence nil-rate bands, and no tax is due. From April 2027, the total is £650,000. That leaves £150,000 taxable at 40%, a bill of £60,000.

Not everything is caught. Death-in-service lump sums and dependants' scheme pensions are excluded. Assets passing to a spouse, civil partner or charity can also be exempt, though the exemption has to be claimed on the estate's inheritance tax account.

Why Your Pension Nomination Form Matters More Now

Your Will usually doesn't control your pension. Most schemes are discretionary, meaning trustees decide who receives the benefits after considering your expression of wishes, often called a nomination form. Many people filled theirs in years ago and haven't looked at it since.

Under the current rules, an outdated form could send money to the wrong person. From April 2027, it could also cost your family tax. A pension passing to your spouse can be exempt. The same pension going to your children isn't, and neither is one going to an unmarried partner, however long you've been together. So who receives the money now helps determine what's left of it.

If you've divorced, remarried, had children or lost someone named on your form, it needs updating. It's worth requesting a copy from each provider, especially if you have old workplace pensions.

How Your Will and Pension Need to Work Together

Until now, Wills and pensions could safely be planned separately. That's no longer true. Three issues are worth raising with a solicitor:

• Who bears the tax. If one person receives the pension and another inherits under your Will, the division of the tax bill needs thinking through.
• Time pressure on executors. Personal representatives are responsible for reporting and paying, and inheritance tax on pensions falls due at the end of the sixth month after death. Beneficiaries become jointly liable once benefits vest in them, and representatives can ask a scheme to hold back up to 50% while the position is worked out.
• The £2 million taper. Pension funds count when testing whether your estate exceeds £2 million, so a larger pot could reduce or remove the residence nil-rate band.

Any executor you've chosen should also know which pensions exist and where to find the paperwork. A simple list kept with your Will can save weeks.

Why You Shouldn't Rush to Empty Your Pension

Headlines about a tax rise can trigger hasty decisions. Withdrawals can be subject to income tax, gifts may only escape inheritance tax if you survive seven years, and money taken out too early isn't there for your own care or retirement. Beneficiaries may also pay income tax where you die aged 75 or over. A regulated financial adviser can model the options, while a solicitor makes sure the legal documents match. Detailed HMRC guidance is still being finalised, so the aim for now is to get organised rather than to make irreversible moves.

What Should You Do Next?

Before 6 April, find your nomination forms, add up your pension values alongside your other assets and check that your Will still fits. Our first contact team can match you with an experienced Wills and estate planning solicitor near you in the QualitySolicitors network, who can see how everything fits together and what, if anything, needs to change. Get in touch for a straightforward conversation, with no pressure to do more than you need.