At the end of July, we had confirmation that the Government is ploughing ahead with plans to include “unused” pension funds in a deceased’s estate for inheritance tax (IHT) purposes. 

The only alteration to the plan that was announced in the October Budget, and detailed in the technical consultation, is that it will be the personal representative that is responsible for paying the IHT relating to the pension, not the pension scheme administrator as originally proposed.

This is only a slightly better option than plan A, but is still fraught with issues, and not the much simpler option of having a separate death benefit charge/pension IHT charge that the industry had asked for.

As we have draft legislation it seems this is unlikely to change other than any minor tweaks.

So, it may be appropriate to start planning based on these new rules coming into effect in 2027.

That said, it’s worth noting that passing on pensions isn’t a primary concern for most clients. Many will have their focus set on ensuring they have enough provision for their and their spouse’s comfortable retirement and covering the eventuality of longevity and potential long term care.

However, there will still be many wealthy clients that have this covered and are looking to estate planning. There are tools out there to help with this, and I’m sure we’ll see more use of trusts and bonds, but for most the simplest option will be to gift more in their lifetime.

When it comes to pensions, taking PCLS before age 75 and gifting it to the next generation will be a popular option for healthy, wealthy clients who are unlikely to need it themselves, and likely to survive the seven years needed for it to be outside the IHT net.

Optimal timing of this is a tricky decision though. Take it too soon and potentially years of tax-free growth in the pension is lost. Take it too late and the client may not survive the seven years.

Once the PCLS is gone, then there may be the option of taking excess income from the pension to make regular gifts. But it’s worth remembering that this will be subject to income tax, and if the client has other assets to live off, using these first may be more tax-efficient for them.

The impending changes have led to much alarm and lots of talk about what the best strategy should be, but now more than ever it’s important to look at what’s important to the client. What are their main objectives? And never let the tax tail wag the financial dog.

Lisa Webster is senior technical consultant at AJ Bell. She is an economics graduate with over 15 years’ experience in financial services. Prior to joining AJ Bell in May 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. She is part of the AJ Bell Technical Team.  Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Twitter: @lisasippster