Brits are making a massive pension shift ahead of a 2027 tax change
With pensions set to come into scope for Inheritance Tax (IHT) from 2027, legacy wealth planning is becoming increasingly significant. Many clients are now reconsidering how their wealth is structured for future generations, and trusts are playing a larger role in securing financial plans.
From 6 April 2027, most unused pension funds and death benefits will be included within the value of a person’s estate for Inheritance Tax purposes, and pension scheme administrators will become liable for reporting and paying any Inheritance Tax due on pensions to HMRC.
As a result of the change, wealth manager Quilter said it has seen an almost 200% increase in the number of Lifestyle Trusts opened in 2024 compared to 2023, and uptake in 2025 is already on track to far surpass this level.
“The financial planning landscape is undergoing a significant shift, and with pensions set to come into scope for IHT in 2027, many advisers and their clients are reassessing wealth structures to safeguard financial legacies,” said Rachael Griffin (Tax and Financial Planning Expert at Quilter).
“The demand for trusts is increasing as clients seek efficient ways to mitigate inheritance tax and maintain control over their financial futures,” she said.
Why the change?
Most estates in the UK do not pay Inheritance Tax. In the coming years, fewer than 10% of estates annually are forecast to have an Inheritance Tax liability due to a combination of nil-rate bands, exemptions and reliefs.
The Inheritance Tax nil-rate band allows all estates to pass on at least £325,000 to beneficiaries without incurring an Inheritance Tax charge.
In recent years, pension schemes have been increasingly used and marketed as a tax planning tool to transfer wealth without an Inheritance Tax charge, rather than for their intended purpose of funding retirement.
This has been exacerbated by certain changes in pensions tax policy over the past decade. The introduction of pension freedoms in 2015 removed a 55% charge for pension funds which remained unused at death and the abolition of the Lifetime Allowance in March 2023 removed the cap on the amount of tax-relievable pension savings an individual can accumulate over their lifetime.
This means that individuals can accumulate unlimited tax-free savings in their pension, draw on other means to fund their retirement and leave their unused pension assets to be inherited by beneficiaries without any Inheritance Tax charge.
