The April 2027 pension changes do not remove the inheritance tax exemption that applies to transfers between qualifying spouses and civil partners. Where pension death benefits pass to a surviving spouse or civil partner, there would usually be no inheritance tax on that transfer. The surviving spouse or civil partner may also be able to use any inheritance tax allowances that were not used on the first death. However, the planning issue has not disappeared. Those inherited pension benefits, together with the survivor’s own assets and allowances, may still create a larger inheritance tax issue when the second person dies.
That means that couples can’t simply put the issue to one side and ignore it.
Why the Second Death Matters
On the first death, pension benefits paid to a qualifying spouse or civil partner would usually be free from inheritance tax. The issue is what happens later. If some of those inherited pension benefits are still in place when the survivor dies, they may then be counted alongside the survivor’s own pension, savings, investments, home and other assets for inheritance tax purposes.
By that point, the surviving spouse or civil partner may have several pots of wealth building up in one estate, including:
- their partner’s pension;
- their partner’s other assets;
- their own pension;
- their own assets;
- the family home; and
- savings and investments.
This concentration of wealth can create a much larger estate on the second death. It may also push the estate above the £2 million residence nil-rate band taper threshold. Put simply, this is the point at which an estate can start to lose some or all of the extra inheritance tax allowance linked to passing on a family home.
Review Pension Nominations
A pension nomination, sometimes called an expression of wishes, tells the pension scheme trustees who you would like to receive your pension benefits when you die. It does not usually force the trustees to follow it, but it is still one of the most important documents to check when planning how pension death benefits might be paid.
It is sensible to check pension nominations after major life events such as marriage, divorce, bereavement, the birth of children or grandchildren, or any significant change in family circumstances. Trustees will still make the final decision where benefits are discretionary, but an up-to-date nomination gives them a clear guide to your wishes and can help avoid confusion at a difficult time.
Some couples will still feel that everything should pass to the survivor, and that may be the right answer for them. Others may want to include adult children, grandchildren or a trust. The important point is that these choices affect more than tax. They can also influence control, protection, fairness between family members and whether the surviving partner has enough financial security.
What About Spousal Bypass Trusts?
In the past, some people used a spousal bypass trust so pension benefits could be paid into a trust, rather than directly to the surviving spouse. The surviving spouse could still benefit from the trust, but one of the reasons for using this approach was to avoid placing the pension fund directly into their estate.
From April 2027, paying pension death benefits to this type of trust will not automatically qualify for the spouse exemption simply because the surviving spouse could benefit from the trust. This means inheritance tax may apply on the first death, even where the surviving spouse is one of the people who could benefit from the trust. If the pension holder dies after age 75, there may also be separate Income Tax consequences when benefits are paid to a trust.
Trusts may still have a useful role, especially where there are vulnerable, young or financially inexperienced beneficiaries, or where control and protection are important. However, they should not be seen as a simple way around the new pension rules. The right answer will depend on the family, the pension scheme and the wider estate planning position.
A Family-wide Review
Good planning looks at the whole family picture. Pension nominations should not sit in isolation; they need to work alongside wills, powers of attorney, how other assets are owned and the retirement needs of both partners. This is particularly important for blended families, unmarried partners and couples where one person has built up significantly more pension wealth than the other.
For our clients, this is the type of issue we consider as part of the regular review process, alongside wider retirement and estate planning. The value of reviewing it early is not to create unnecessary worry, but to make sure the existing plan still works as the rules change, family circumstances evolve and pension values move over time.
If you are unsure whether your pension nominations, wills and wider estate planning still line up, it may be worth checking. In many cases, the right answer will simply be confirming that the current plan remains suitable. In others, a small change now could help avoid confusion or unintended tax consequences later.
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