From April 2027, unused pension pots will be counted as part of your estate. Linsey Dagger of Gibson Kerr explains what that means for Scottish families, and why now is the time to review your plans.
For almost 10 years, pensions have been central to family estate planning. Since 2015, we’ve been told that the money left in a defined contribution pot sits outside our estate, beyond the reach of inheritance tax. Many have planned their retirement accordingly, drawing on savings and investments first, leaving their pension untouched for the next generation.
However, that advice is about to change because from 6 April 2027, most unused pension funds and pension death benefits will be treated as part of the estate of the person who died. The legislation is now law, so this is definitely coming about and people should be aware.
Who will be affected?
Sometimes we think inheritance tax is a problem for the very wealthy, but it is not. The nil-rate band has been stuck at £325,000 since 2009. The residence nil-rate band, available when a home passes to children or grandchildren, has been £175,000 since 2020. Both are now frozen until April 2031. So with rising property values in Edinburgh and across Scotland, many ordinary homeowners are already closer to the threshold than they might realise.
Take, for example, a single homeowner in Edinburgh with a £400,000 flat, £100,000 in savings and a £300,000 pension pot, all of which is left to their children. Today, the pension is ignored. The £500,000 estate will fall within the combined allowances, so no inheritance tax is due. But after April 2027, the same estate would be valued at £800,000, and the family could face a tax bill of around £120,000.
And that’s not all: If the person dies aged 75 or over, beneficiaries of their will still pay income tax at their own rate on the inherited pension, that’s on top of any inheritance tax already paid.
What hasn't changed
Some protections remain in place. Anything left to a surviving spouse or civil partner is still exempt, and qualifying death-in-service benefits from a registered pension scheme are excluded from the new rules. The upshot is that, for many married couples, the immediate impact will fall on the second death rather than the first.
A complication for executors
Under the new rules, executors will carry responsibility for gathering pension information and reporting it to HMRC. In Scotland, executors already manage the confirmation process, often while grieving. Adding pension valuations and tax calculations makes a well-organised estate more important than ever.
Action you can take now
Planning ahead early and taking a fresh look at a will and estate plan that may have been written on assumptions that no longer hold means your estate can be better protected, and there should be fewer surprises.
Practical steps you can take include:
• Reviewing your will alongside your pension nomination forms, making sure they work together and not against each other
• Rethinking how you use your retirement income, as spending pension funds before other savings might now make more sense
• Think about making lifetime gifts, including regular gifts, which can fall outside your estate
• Exploring whether a trust is appropriate for you
• Making sure your executors know exactly what you have and where it is held
Every family's circumstances are different, and the right answer for you depends on your age, your health, your family and your wishes. What is certain is that pensions can no longer be treated as a tax-free inheritance by default, and April 2027 is closer than it looks.
Gibson Kerr's Personal Law team advises on wills, estate planning and inheritance tax from offices in Edinburgh and Glasgow. Call 0131 202 7516 or visit gibsonkerr.co.uk.