Whilst the full details of how these rules will work in practice are still emerging, the broad shape of the changes is clear and there are practical steps you can take now. Below are three steps to consider ahead of April 2027.
1. Track Down Your Pensions
Before reviewing your estate plan, it is important to understand what pension arrangements you have. Many people accumulate several workplace and personal pensions throughout their career and may lose track of older schemes over time.
If you think you may have forgotten about a pension, the Government's free Pension Tracing Service can help you locate pensions from previous employers. As you identify each pension, make a note of the key details including the pension provider, the type of pension and your current pension nominations. Bringing this information together will make it much easier to review your existing arrangements.
2. Review Your Pension Nominations
Once you have identified your pension arrangements, the next step is to review your pension nominations, often referred to as an Expression of Wishes. This document tells the trustees of your pension scheme who you would like to receive your pension benefits on your death. Unlike assets passing under your Will, pension benefits are usually distributed at the discretion of the pension scheme trustees. Whilst trustees are not bound to follow your nomination, they will often do so unless there is a good reason not to. Keeping your nomination up to date is therefore an important part of ensuring your pension death benefits pass in accordance with your wishes.
From April 2027, many unused pension funds may be brought within the scope of inheritance tax in circumstances where they would previously have fallen outside a person's estate. As a result, who you nominate to receive your pension benefits may become even more significant as part of your wider estate planning. Whilst benefits passing to a surviving spouse or civil partner continue to benefit from the spousal exemption for inheritance tax purposes, inheritance tax may now be charged where pension benefits pass directly to children, grandchildren or other beneficiaries. It is therefore sensible to review whether your existing nominations continue to achieve the outcome you intend.
It is also worth considering what should happen if your chosen beneficiary dies before you. Reviewing your nomination to update both your primary and any substitute beneficiaries ensures your wishes remain clear. It is important to remember that your pension nominations are separate from your Will and both should be reviewed together to ensure they continue to work alongside each other.
3. Review Your Estate Planning
Reviewing your pension nominations is only one part of the process. The forthcoming changes mean it is equally important to consider how your pension arrangements fit alongside your wider estate planning. Your Will and pension nominations should work together to achieve the outcome you intend. It is of particular note that the value of your pension will now aggregate to your estate and may impact whether your estate will qualify for the residence nil rate band or possibly the reduced rate of inheritance tax where you leave 10% of your estate to charity.
The changes due to take effect from April 2027 mean it is sensible to review whether your Will and wider estate planning continue to reflect your wishes. We work closely with financial advisers and are very happy to meet alongside your financial adviser to look at the full picture together. In our experience, bringing together legal and financial advice in one conversation can be beneficial to your wider estate planning. If you do not have a financial adviser and would like a recommendation, we are happy to help with that too.
Further Updates to Follow
The full detail of how these rules will work in practice will become clearer as HMRC publishes its guidance and secondary legislation in the coming months. We will be providing further articles as that picture develops, so please do check back for the latest information.
