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How the 2027 pension changes prompted Jackie and Doug to rethink their plans
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- How the 2027 pension changes prompted Jackie and Doug to rethink their plans
Upcoming pension changes prompted Jackie and Doug to rethink their plans, finding new opportunities to pass wealth to their children tax-efficiently.
Doug and Jackie, aged 69 and 71, were enjoying a comfortable retirement, with income supported by their full State Pensions and several defined benefit pensions. They had also been using their ISAs to supplement their income, making tax-free withdrawals when needed.
Between them, they had £750,000 in SIPPs and hadn’t needed to touch a penny of it.
That was deliberate. They had always intended to leave their pensions until last, with the aim of passing this significant asset on to their two adult children, William and Beth. As things stood, their SIPPs sat outside their estate for inheritance tax (IHT) purposes, making them an attractive way to pass wealth to the next generation.
But things are changing.
New pension legislation due to come into effect in April 2027 mean that any SIPP left when Doug and Jackie die could become part of their estate for IHT purposes, potentially resulting in a 40% IHT charge.
And if they lived beyond 75, any pension their children inherit could also be subject to income tax at their marginal rate. Together, these taxes could potentially take a significant proportion of the pension pot.
There was another complication. William and Beth both had successful careers earning just over £100,000 each a year. Once their income reached this level, their personal allowance started to reduce. Combined with frozen income tax bands, this meant some of their additional income could effectively be taxed at 60% considerably higher than the 45% rate Doug and Jackie had assumed was the maximum.
With all this in mind, they wanted to understand whether there was a better way to use their pensions to benefit the family.
We helped Doug and Jackie look at their pensions as part of the family’s wider financial picture, rather than simply leaving them untouched.
Our advice was to start drawing from their SIPPs gradually, making use of their available tax-free cash pension benefits where appropriate. This would reduce the amount remaining in their pensions and in turn, the amount that could potentially be exposed to IHT in the future.
We also advised them to use some of the money they withdrew to make pension contributions for William and Beth. This meant their children could benefit from tax relief on those contributions at their marginal rates and hence remove them from the “60% income tax trap.”
Doug and Jackie have now started putting this strategy into action, gradually moving wealth from their pensions to the next generation in a way that could reduce the family’s overall tax bill while helping William and Beth build their own retirement savings.
What began as a concern about the new pension rules has prompted Doug and Jackie to take a fresh look at how and when they want to pass on their wealth. Rather than leaving their pensions untouched, they’re now taking steps to make their money work for the whole family.
They’re also exploring whether they can make regular gifts from their income, potentially allowing them to pass on more wealth during their lifetime while reducing the value of their estate for IHT purposes.
Client names have been changed to protect their identity.
This case study is intended as illustrative purposes only; it does not constitute individual advice and should not be used to inform financial decisions.
They are based upon our understanding (at the time of advice) of current law, HM Revenue and Custom's practice, tax rates and exemptions, which are subject to change.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.
The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice.