The importance of seeking advice about the upcoming changes to inheritance tax and pensions

The treatment of pensions within inheritance tax (IHT) is set to change materially. From 6 April 2027, most unused pension funds will be brought within the scope of an individual’s estate for IHT purposes.

Historically, pensions have sat outside the estate, making them one of the more tax efficient vehicles for intergenerational wealth transfer. This structural advantage is now being removed.

For clients with significant pension holdings, this represents a meaningful shift. Estate planning strategies that have relied on pensions as an IHT efficient asset class may require review to ensure they remain aligned with the evolving legislative framework.

Legislative change and fiscal drag are increasing IHT exposure

These changes sit alongside a continued freeze on IHT thresholds until at least 2031, extending the impact of fiscal drag.

In practical terms, this is likely to bring a greater number of estates into scope for IHT, while increasing liabilities for those already exposed. The inclusion of pension assets from 2027 will further increase overall estate values for IHT purposes.

For some clients, this introduces a new consideration, while for others it changes the scale of an existing one.

Liquidity considerations within estate planning

A key consideration in estate planning is how any IHT liability will be funded.

Many estates are comprised largely of illiquid assets, such as property, private investments, or business interests. These may not be readily realisable within the required timeframes, since IHT liabilities are typically due within six months of death.

Including pensions within the estate may increase the overall liability without improving liquidity, which can create a larger funding requirement.

Without appropriate structuring, this can lead to:

• The need to realise gains
• Potentially unfavourable timing of disposals
• Delays in estate administration

These are practical considerations that can influence how effectively an estate plan is executed.

Life insurance as part of an integrated planning approach

Life insurance can form part of the solution when considering how to meet IHT liabilities.

Where policies are written into trust, proceeds are generally outside the estate and can be accessed more quickly than assets subject to probate. This can provide a source of liquidity at the point it is required, without affecting the underlying asset base.

As with any planning tool, the effectiveness of life insurance depends on how it is structured and how it fits within the wider strategy.

Maintaining planning efficiency over time

As estate values evolve and legislative frameworks change, the interaction between liability and funding becomes increasingly relevant.

Establishing appropriate arrangements at an earlier stage can provide:

• Greater flexibility in structuring
• More predictable cost outcomes
• Alignment with broader estate and tax planning objectives

By contrast, leaving these considerations until later  may reduce available options or increase the cost of implementation.

A role for professional advisers

For professional advisers, these changes provide a clear basis for revisiting estate planning discussions with clients.

Where pension assets form a material part of overall wealth, or where estate values are approaching relevant thresholds, it may be appropriate to review existing arrangements in light of the forthcoming changes.

Introducing protection planning as part of a coordinated approach can:

• Support effective liquidity planning
• Complement tax and legal strategies
• Contribute to the overall robustness of the estate plan

Get in touch

At John Lamb Hill Oldridge, our advisers are experts in offering bespoke insurance that supports high-net-worth and ultra-high-net-worth clients in protecting their wealth. For more information about how we can help you to support your clients, please get in touch. Email mail@jlho.co.uk or call us on 020 7633 2222.

Please note

This article is for general information only and does not constitute advice.

All information is correct at the time of writing and is subject to change in the future. The Financial Conduct Authority does not regulate estate planning, trusts, or tax planning.

Note that financial protection plans typically have no cash in value at any time, and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.