A client called me last week. A business owner with an estate worth around £1.5 million. Nearly a third of that, £450,000, is in his SIPP. For years, he operated on the basis that his pension was sheltered from inheritance tax. He read about the government's plans, and his question was direct: 'What does this mean for my children?' The reality is, it creates a significant problem that many families are not yet aware of.
The Upfront Bill
From 6 April 2027, the rules change. Most private pensions will be brought into your estate for inheritance tax purposes. This closes a long-standing shelter. But the real issue is one of liquidity. When you leave a property, your beneficiaries can pay the 40% tax bill in ten annual instalments. It's manageable. With pensions, HMRC will not offer this option. The entire IHT liability attributable to the pension must be paid upfront, before the beneficiaries can access the money. For an inherited pension pot of £450,000, that could mean finding £180,000 in cash, fast. If the rest of the estate is tied up in a family home or a business, that is a serious challenge.
Planning for Liquidity
The entire planning landscape for passing on wealth has been altered. We used to focus on sheltering assets. Now, we must also plan for cashflow on death. One of the most effective tools for this is a life insurance policy written into a discretionary trust. The policy is chosen to cover the projected IHT liability. Because it sits in a trust, the payout is not part of your estate. It delivers a lump sum of tax-free cash directly to your beneficiaries. This gives them the funds to pay the IHT bill from the pension and other assets, without having to sell the family home under pressure or dismantle a business.
These rules are still a few years away. You have a window to adjust your plan. The details are technical, but the conversations about securing your family's future do not need to be. If this change affects your planning, we should talk.
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Written by Sean Kiani, Estate Planner at Inheritance Made Simple. Sean writes and reviews the firm's guidance on estate planning, wills, trusts and inheritance tax, and works with families across Bournemouth, Poole, Dorset and Central London. Verify Sean's Society of Will Writers membership listing.