Are Your Pensions Ready for April 2027?
If you have pension pots with more than one provider, the next few months before April 2027 is an important time to review whether bringing them together could make your retirement and estate planning simpler.
What is changing in April 2027?
Pensions have long been one of the most tax-efficient ways to pass wealth to the next generation. Unlike most of your estate, pensions have historically sat outside of Inheritance Tax altogether. That is about to change.
From April 2027, unused pension funds will be included in your estate for Inheritance Tax purposes. This is a significant shift, and it means pensions need to be considered as part of your estate planning in a way they simply did not before.
The good news is that there is still time to plan. Consolidating your pensions into a single, well-chosen provider is one of the most practical steps you can take, and it matters now more than ever.
Why Consolidate?
- Easier administration on death
When someone dies, their personal representatives (whether that is an executor of a will or an administrator of an estate), have a considerable amount to deal with. If pensions are scattered across three, four or five different providers, that means three, four or five separate sets of paperwork, phone calls, waiting times and processes. Consolidating into a single pension means there is one provider to contact, one set of forms to complete, and one process to follow. For your family at what is already a difficult time, that simplicity genuinely matters.
- One expression of wishes
Most people will have completed a nomination form, sometimes called an expression of wishes, with their pension provider. This tells the provider who you would like to benefit from your pension when you die. If you have pensions with multiple providers, you need a separate nomination form with each of them, and if your circumstances have changed over the years, there is a real risk that some of those forms are out of date.
Bringing your pensions together means a single, up-to-date nomination form with a single provider. It is cleaner, clearer, and far less likely to cause confusion or delays. Not to mention it results in far easier administration while you are alive as well, meaning you only need to deal with one pension providers website, one place to go if you have questions, and one place to keep track of relevant contributions and allowances.
- The provider you choose really matters (especially from April 2027!)
This is the point that many people overlook, and from April 2027 it becomes critical.
Not all pension providers offer something called beneficiary drawdown. Beneficiary drawdown allows your beneficiaries to inherit your pension and keep it invested, drawing from it only as and when they choose, rather than being forced to take it all as a lump sum, which can have hugely negative tax consequences.
The difference can be enormous in practice. As you can see below…
The £400,000 pension: two very different outcomes
Imagine someone dies after the age of 75 with a £400,000 pension. They have already used their Inheritance Tax allowances, so the full pension is subject to Inheritance Tax at 40%. Given that IHT is deducted before potential income tax, that reduces the pension by £160,000 straight away, leaving £240,000 for the beneficiary.
If the provider does not offer beneficiary drawdown:
The £240,000 may have to be paid out as a lump sum. That lump sum is treated as income in the tax year it is received, therefore if the beneficiary is already a higher rate taxpayer, this payment will push the beneficiary into the additional rate band for income tax. On £240,000 that could mean another ~£108,000 in tax, leaving the beneficiary with around £132,000 from a pension that was originally worth £400,000. In other words, two thirds of the pension has gone to HMRC, not the beneficiaries.
If the provider offers beneficiary drawdown:
The same Inheritance Tax of £160,000 applies, so we are still starting from £240,000. But instead of being forced to take it as a single lump sum, the beneficiary can keep the money invested and draw from it in a way that suits their own circumstances and tax position. They might take £12,570 tax-free each year using their personal allowance once they stop working, or spread withdrawals over several tax years to stay within a lower tax band. Managed carefully, the income tax bill on that £240,000 could be dramatically reduced compared to the lump sum scenario.
The pension pot is the same, the Inheritance Tax is the same. The difference is simply which provider holds the pension, and whether they offer beneficiary drawdown. Doing some pension administration now could genuinely save your beneficiaries thousands in tax later down the line.
- Cost is also worth thinking about
Old pension pots, particularly those from workplace schemes you were enrolled in years ago, can carry higher charges than modern alternatives. When you are consolidating, it is worth comparing what you are currently paying across your various pensions. Most platform providers also charge discounted rates on higher value pension pots. Bringing everything into a single, competitively priced plan can make a meaningful difference to the value of your pension over time.
What should you do?
If you have pensions with multiple providers, we encourage you to consider consolidating. It is not always the right answer, and there are cases where certain pension benefits are worth preserving with older schemes, but for many people the combination of simplicity, better estate planning and lower provider costs makes it a straightforward decision.
April 2027 is closer than it might feel. The changes coming to pension taxation mean that getting this right has never been more important. In the run up to April there are other factors aside from pension consolidation that you should be thinking about too, such as considering an annuity, gifting out of excess pension income, efficient drawdown strategies, and much more.
If you would like to talk through your own situation to see if a change of plan is necessary, please get in touch with your usual adviser.
