Most advisers can think of at least one client who has deliberately left money in their pension for the next generation.
In many cases, that decision was made on the understanding that pension wealth sat outside the estate for Inheritance Tax (IHT) purposes. For years, that assumption has shaped discussions about retirement and estate planning alike.
However, from spring 2027, it will, if things continue as planned, no longer hold.
Under legislation due to take effect from 6th April 2027, unused pension funds and death benefits will be brought into the IHT calculation. While the legislation is now settled, many clients remain unaware of what the change could mean for their estate plans.
For advisers, the change creates an opportunity to revisit discussions that may not have been reviewed for some time.
Why this change will resonate with clients
For many people, a pension represents decades of hard work, sacrifice and financial discipline. It is often one of their largest assets outside the family home.
Many clients have spent years building pension wealth not only to support their retirement, but also because they believed it could be passed to future generations efficiently.
The new rules do not change the value of the pension itself, but they do change how many clients may think about it within the context of their wider estate plan.
For some, the prospect of a larger IHT liability may come as an unwelcome surprise. Others may simply need reassurance that a range of planning options remains available.
Both conversations are important.
The impact may extend beyond the pension itself
One key aspect of the changes is the interaction with other estate planning allowances.
For some clients, bringing pension assets into the estate could increase total estate values sufficiently to affect the Residence Nil Rate Band (RNRB).
Given the RNRB begins to taper once an estate exceeds £2 million, reducing by £1 for every £2 above that threshold, some clients may face not only a larger taxable estate, but also the partial or complete loss of a valuable inheritance tax allowance.
While the outcome will depend on individual circumstances, it highlights the importance of reviewing pensions within the context of the wider estate rather than in isolation.
The real challenge is not just the legislation
Most advisers understand, or will understand, the rules – the greater challenge is helping clients understand what the rules mean for them.
Estate planning decisions rarely happen after a single meeting. Clients need time to absorb information, discuss matters with family members and consider how different options fit with their wider objectives.
That is especially true when long-held assumptions are being challenged.
The advisers who are making progress are not necessarily those with all the answers today. They are the ones creating space for considered conversations, giving clients the opportunity to understand the implications and reflect on their options.
Identifying clients who may be affected
The approaching changes create a natural opportunity to revisit existing estate planning arrangements.
Aside the most critical one – “what is the impact on total estate value and potential IHT bill?” – questions advisers may wish to explore include:
How much of the client’s wealth is held within pension arrangements, and how is that forecast to grow?
- What role, if any, does the pension currently play within their estate plan?
- Have beneficiaries been identified and reviewed recently?
- Are existing plans still aligned with the client’s objectives?
- Could additional estate planning measures be appropriate?
- Every client will answer those questions differently. That is why conversations matter more than assumptions.
Where Business Relief fits into the discussion
There is no single solution to estate planning. However, Business Relief (BR) remains one of the most effective tools for reducing an IHT liability.
Though by no means the only reason, one attractive feature of BR is, of course, the relatively short qualification period.
BR qualifying investments can become eligible for relief after two years, compared with seven years for many lifetime gifting strategies.
For clients reviewing their estate planning arrangements in light of the pension changes, that shorter timeframe may be a relevant consideration.
BR solutions can therefore play an important role alongside other planning measures, helping advisers build solutions that reflect individual circumstances and objectives.
As always, suitability will depend on the client’s needs, goals and attitude to risk.
Why early engagement matters
The introduction of the new pension rules in April 2027 is significant, but the period before they take effect provides an opportunity for advisers and clients to review existing arrangements in a considered way.
As our adviser clients know, estate planning decisions can take considerably longer to implement than clients expect.
Discussions frequently involve family members, wider succession plans and multiple planning strategies. Where Business Relief solutions are being considered, the two-year qualification period means that every month of delay pushes back the point at which relief may become available.
For advisers, that makes the period before April 2027 particularly valuable.
Clients who understand the changes will be better placed to make informed decisions about their estate plans. For advisers, this is an opportunity to revisit assumptions, explore available planning options and ensure clients fully understand the implications of the new rules.
The legislation may be settled, but many conversations are only just beginning.
