For many years, pensions have quietly played a starring role in estate planning, as a means of reducing a potential Inheritance Tax (IHT) bill.
Unlike property or savings, pension pots have often sat neatly outside the estate, protected from Inheritance Tax and allowing beneficiaries to receive value with relatively little erosion.
That landscape is now shifting following successive Budgets, which have introduced proposed changes to the treatment of unspent pensions for Inheritance Tax from 2027, followed by expected reforms to salary sacrifice arrangements from 2029.
Combined, these changes are likely to result in smaller pension pots over a person’s lifetime.
However, even though savings may be reduced, their inclusion as part of the estate may drag many more families into the IHT regime.
How pensions have traditionally been treated
At present, most defined contribution pensions do not usually form part of an individual’s estate for Inheritance Tax purposes.
Instead, they sit outside the estate and are paid at the discretion of pension scheme trustees.
This has made pensions particularly attractive. Funds could often be passed IHT-free, accessed flexibly by beneficiaries and in some cases withdrawn free of Income Tax where death occurred before the age of 75.
For this reason, many people have deliberately preserved their pension pots during retirement, choosing to draw on other assets first.
The impact of unspent pension changes from 2027
From 2027, unused pension pots may be brought within the scope of IHT on death.
This represents a fundamental shift in thinking. Instead of sitting cleanly outside the estate, pension funds could face tax of up to 40 per cent.
However, more importantly, when combined with other assets, the value of pension pots is likely to draw more of the whole estate into the scope of IHT.
From a probate perspective, the change also introduces added complexity, with pension values needing to be carefully reported and factored into the overall estate position.
Salary sacrifice reforms from 2029
At the same time, further changes are expected from 2029 in relation to salary sacrifice arrangements.
Salary sacrifice has long been a tax efficient way for employers and employees to boost pension contributions.
Reforms in this area may reduce its appeal, potentially slowing the growth of pension pots in the years leading up to retirement.
When combined with the proposed IHT changes, this creates a double impact. Not only could pension pots be smaller, but more of their value could be lost to tax on death.
What this means for probate planning
Together, these developments mark a clear shift in how pensions should be viewed within estate planning.
From a probate standpoint, executors and administrators may find themselves dealing with pension assets in ways they have not previously encountered, often requiring closer coordination with pension providers and other professional advisers.
For those planning ahead, the changes raise important questions. It may no longer be sensible to preserve pension wealth at all costs and in some cases accessing pensions earlier could reduce future Inheritance Tax exposure.
It also becomes increasingly important to view pensions alongside other assets, such as property, investments and business interests, rather than treating them as a separate and protected category.
Planning for pension reform
Pensions will remain a valuable part of retirement planning, but their role as an estate planning tool is clearly evolving.
Probate planning is no longer just about property and cash. Understanding how pensions fit into the estate and how future changes may affect their value, is now key to avoiding unwelcome surprises and protecting as much wealth as possible for the next generation.
