For many people, their pension is one of the largest assets they own after their home.
Yet it is often one of the least understood parts of estate planning.
Many people assume their pension will simply pass according to their Will when they die.
That is not necessarily the case.
Pensions have their own rules, and changes due from 6 April 2027 mean they are becoming increasingly important when considering inheritance tax and the wider structure of an estate.
Does Your Pension Pass Under Your Will?
Usually, defined contribution pension benefits do not simply pass under the terms of your Will.
Depending on the pension scheme and circumstances, the scheme administrator or trustees will determine who receives the remaining pension benefits, taking account of information such as your nominated beneficiaries.
This is why your Expression of Wish or beneficiary nomination can be important.
If you completed one many years ago, it may no longer reflect what you actually want.
Marriage, divorce, children, grandchildren and changes in family circumstances can all affect who you would now want to benefit.
What Happens to Your Pension When You Die?
The answer depends on several factors, including:
- the type of pension you have;
- the rules of the particular pension scheme;
- your age when you die;
- how the pension benefits are taken;
- who receives them; and
- the tax rules applying at the time.
Defined benefit and defined contribution pensions can also operate very differently after death.
This means there isn’t one answer that applies to every pension.
Why Is April 2027 Important?
The inheritance tax treatment of pensions is due to change significantly from 6 April 2027.
Under the Government’s planned reforms, most unused pension funds and pension death benefits are expected to be brought within the scope of inheritance tax.
For some families, this could materially increase the value of the estate exposed to inheritance tax.
Someone who previously believed they had an estate of £1.5 million, for example, might need to look at their position very differently if they also have a substantial pension.
It can also affect other aspects of inheritance tax planning, including whether an estate approaches or exceeds the £2 million threshold at which the Residence Nil Rate Band begins to taper away.
Your Beneficiary Nomination Matters
One of the simplest things pension holders can do is check who is currently nominated to receive their pension benefits.
People sometimes discover that nominations were completed 10 or 20 years ago and have never been reviewed.
Others assume their Will automatically deals with the pension.
Neither is a good reason to leave the position unchecked.
Your pension provider should be able to tell you what beneficiary information or Expression of Wish they currently hold and how it can be updated.
Your Pension Shouldn’t Be Looked at in Isolation
The pension is only one part of the estate.
Your property, investments, cash, business interests, life insurance, trusts and other assets may all interact with the eventual inheritance tax position.
That becomes particularly important when the value of the estate is growing.
A pension that is worth £500,000 today may be worth considerably more in ten or twenty years.
Likewise, property and investment values may continue to increase.
Estate planning therefore needs to consider not only what your estate is worth today, but what it could potentially be worth when assets eventually pass to the next generation.
Questions Worth Asking Now
If you have a substantial pension, it is worth understanding:
- What type of pension do you have?
- Who is currently nominated as beneficiary?
- When was that nomination last reviewed?
- What happens to the pension on your death?
- How could the April 2027 changes affect your estate?
- Could including the pension push your estate above important inheritance tax thresholds?
- Does your pension fit with what your Will and wider estate plan are trying to achieve?
You may already have everything structured correctly.
But it is better to know that because you have checked it than simply assume it.
Start With the Whole Estate
A pension decision should rarely be made purely because of inheritance tax.
Retirement income, investment risk, access to capital, family circumstances and your own financial security all matter.
The starting point is therefore to understand the complete picture.
What do you own? Who do you want it eventually to pass to? What is likely to happen under the current structure? And what could change from April 2027?
Once those questions have been answered, you can begin to understand whether anything actually needs changing.
Could Your Pension Face a 40% Inheritance Tax Hit?
Understand how the April 2027 pension inheritance tax changes could affect your pension, your estate and the wealth you eventually pass to your family.