Change Mindset as Inheritance Tax on Pensions Means Retirement Strategy Reset

We have already covered the fact that in the Autumn Budget 2024, Chancellor Rachel Reeves announced that unused pension funds will be included in the estate calculation for inheritance tax (IHT) purposes from April 2027.  This was followed by a HMRC consultation with 600 replies received.  The findings of this with regard to its implementation and working in practice was published on 21 July 2025 alongside the draft legislation to amend the Inheritance Tax Act 1984 to include unused pension funds. 

See Budget 24 Pensions & IHT  Fees from Pension Reduce IHT

There are many people that have saved, and built-up investment linked pensions with the plan to drawdown and spend what they need from those pension funds to supplement other retirement and investment income with a view that unused pensions could be left potentially tax free to loved ones on death.

See Pension Death Benefits 24

Changing Mindset and Strategy on Pension Funds

The above changes mean that we urge all pension investors to rethink their retirement and inheritance tax planning strategy.

We suggest you need to list out and project your current and future income and capital needs as:

• Your pension funds should now form part of your capital decumulation plans in retirement (i.e., spending it) and
• Your other investments should now form part of your care fees planning and death/estate/inheritance tax planning.

Divide your future income and capital needs into short term (years 1-5), medium term (years 6-10) and long-term needs (year 10 onwards).  You need to be methodical in this, and we suggest you:

• Work out your likely expenses and then allowing for inflationary increase, cash flow model them for each year in retirement.
• Work out your likely income (state pension, defined benefit pensions and other sources of property and rental income) and model them forwards again for each year in retirement allowing for inflationary increases and modest investment growth.
• Make allowances for one off capital expenditure needs in the future e.g., holidays, moving home, downsizing, replacement cars, a new roof etc.

This will help you work out any excess or shortfall for income and capital over the coming years.

Spend Pensions and Protect Other Capital for IHT

Now you can start to plan for decumulating your pension funds with a strategy to exhaust them or reduce them alongside other assets to be below inheritance tax thresholds or at least be much lower and remember that:

• Business interests in real, trading businesses are inheritance tax free up to £1m under Agricultural and Business Property Relief.  Consider investing in businesses (even as a sleeping partner if you prefer) for income delivery and the bonus of being IHT free up to £1m.
• ISAs, bank accounts and investments are included in your estate calculation unless you have gifted them to loved ones and survived for 7 years.  Therefore, in your 60s, 70s and 80s, whilst ISAs may be attractive as they grow tax free, ultimately, they are not tax free as they may be subject to 40% inheritance tax on death.
• There is no point in achieving £20.000, £50,000 or £100,000 of extra growth on your stock ISA/other investments if the value of the whole investment and that extra £20.000, £50,000 or £100,000 growth is then subject to 40% IHT on death.  HMRC will thank you, but your children may not.
• Investing wealth inside trusts such as discounted gift trusts and inheritance loan trusts can reduce IHT liability overnight (without losing value) and/or protect future growth from IHT.

Where to Invest – Your New Mindset

• For short term capital and income needs, consider accessible, lower risk type investments such as cash, cash ISAs, national savings etc
• Loan Trust:  For medium and longer term assets that you may need capital access to, consider inheritance loan trusts as you still have access to 100% of the original capital but all future investment growth is in trust for loved ones and free from IHT.  For example:
• We set you up a trust for £1.  You then lend (interest free) the trust £100,000 (a ‘loan trust’).  The trust then invests the money, and all growth is in trust for your loved ones and is IHT.
• You can have some or all your loan repaid at any time to pay for capital expenses needs or even to fund later life care, but all the growth is protected for loved (IHT free) unlike growth in a stock ISA that just means more IHT to pay on that growth.
• Discounted Gift Trust: For medium and longer term assets that you may need income from but will not need to access the capital, consider discounted gift trusts as you can receive up to 5% pa ‘income’ withdrawals for life, income tax free, and 100% of the capital value is in trust for loved ones, with the capital value for IHT calculation reduced overnight by a % based upon your life expectancy but the value inherited by loved ones is still 100% plus growth.  For example:
• You are aged 70 and we invest £100,000 for you in a discounted gift.  You receive 5% pa in regular withdrawal payments each year from the investment.  Your life expectancy is 10-15 years and this means both we, the investment company and HMRC expect you to receive at least 50% to 75% of the original value of the investment over the years before you die.
• On day 1, the real value of the actual investment £100,000 and any future growth is in trust for loved ones but the ‘gift value’ for IHT calculation is discounted by say 50% to £50,000 based upon your life expectancy.  You have reduced the value of the investment for IHT immediately.
• If you die between day 1 and 7 years, the value of the investment for your loved ones is £100,000 plus growth, but the value of the gift included in your estate for IHT purposes is discounted by 50% to just £50,000.  You have halved the value of your investment for IHT overnight by 50%.
• If you live longer than 7 years and then die later, say in your 80s,  you continue to receive your 5% pa regular payments and the value of the investment inherited by your loved ones is the full value of the investment and it is totally IHT free.

See Insurance Bonds  IHT Discounted Gift  IHT Loan Trust

Change your mindset, change your retirement and inheritance tax planning strategies right now. 

Talk to us about our ‘In Retirement, Inheritance Tax, Later Life and Care Planning Strategy Review’.

See: Later Life & Inheritance Tax Review

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