Your pension and inheritance tax (IHT): what’s changing for dentists in 2027?

From April 2027, most unused pension funds and pension death benefits are set to be included in inheritance tax calculations. Wesleyan Financial Services explores what the changes could mean for dentists and their retirement and estate planning.

For many dentists, a pension represents years of careful saving. As well as helping to fund the retirement you want, your pension savings may also form an important part of the legacy you hope to leave behind.

But changes to inheritance tax (IHT) rules could affect how that legacy is passed on. From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of an estate for IHT purposes.

These changes could significantly impact the way you think about retirement and estate planning.

Tax treatment depends on your individual circumstances and may be subject to change in the future.

What’s changing with pensions and inheritance tax?

Currently, most unused pension funds held in pension schemes can be passed on to beneficiaries outside of your estate. This means they don’t normally count towards the value of your estate for inheritance tax purposes.

As a result, some people in retirement choose to use other savings and investments first (such as ISAs), leaving more of their pension untouched to pass on to loved ones.

From 6 April 2027, this is set to change. Most unused pension funds and pension death benefits will be included when calculating the value of your estate for IHT.

The standard IHT threshold is currently £325,000. There is also an additional residence nil-rate band of up to £175,000, which may apply when you leave your home to direct descendants (such as children or grandchildren). If the value of your estate exceeds these thresholds, the amount above them could be subject to IHT.

The standard rate of IHT is currently 40%. This means that for some people, leaving money in a pension could increase the value of their estate for IHT purposes from April 2027.

Please note the Financial Conduct Authority (FCA) does not regulate inheritance tax planning and trusts.

Will every pension be affected?

No. There are some important exceptions. For example, pension benefits passing to a spouse or civil partner can generally benefit from the existing spouse or civil partner exemption, subject to the relevant conditions.

Certain pension benefits are also specifically excluded from the new rules. These include qualifying dependants’ scheme pensions and death-in-service benefits.

This distinction could be particularly important for dentists with defined benefit pension arrangements (such as the NHS Pension Scheme), which will not form part of the deceased’s estate for IHT purposes.

It also means it’s important not to assume that the headline ‘pensions will be subject to IHT’ applies in exactly the same way to every pension or every benefit.

What could this mean for dentists?

Dentists can build wealth in many ways during their careers – whether it’s pension savings, investments or property. For practice owners, there can also be value held within a business.

Bringing unused pension savings into the IHT calculation could therefore push some estates over the available thresholds or increase the amount of an existing estate that is liable for tax.

Of course, that doesn’t mean that you should stop paying into your pension or start withdrawing large sums simply because the rules are changing.

Pensions continue to offer important tax advantages while you are saving for retirement, and taking money out can have tax consequences of its own. More importantly, your pension’s first job is usually to help fund the retirement you want.

The key is understanding whether the strategy you already have still makes sense.

What about income tax on an inherited pension?

Income tax is another factor to be aware of when pensions are inherited. Under current rules, the tax treatment of pension death benefits generally depends on factors including the pension holder’s age when they die and the type of benefit being paid.

Broadly, where somebody dies before age 75, pension death benefits can usually be paid without income tax, up to the Lump Sum and Death Benefit Allowance. From April 2027, these pension savings may be subject to IHT, although the existing income tax treatment will continue to apply.

For those who die aged 75 or over, pension benefits are generally subject to income tax when received by the beneficiary, as well as potentially being subject to IHT from April 2027.

However, the new rules are designed to prevent income tax also being charged on pension benefits that are used to meet an IHT liability. The exact tax position will depend on individual circumstances, including how the IHT liability is paid.

This is one reason why looking at the whole picture (rather than considering IHT or pensions in isolation) will become increasingly important.

Who will be responsible for paying the tax?

Another important development is that the deceased’s personal representatives will be responsible for reporting and paying any IHT due on pension wealth.

If IHT may be due on the pension, personal representatives can ask the pension scheme to temporarily withhold up to 50% of certain pension benefits while the tax position is worked out.

In some circumstances, the pension scheme will also be able to pay any IHT due on the pension benefits directly, rather than the money having to come from elsewhere in the estate.

For families dealing with an estate, that could add another layer of administration. Keeping clear records of your pension arrangements and making sure your expression-of-wish nominations are up to date could therefore become even more valuable.

Should you change your retirement plans now?

For lots of dentists, the answer won’t be as simple as ‘take more money out of your pension’. A decision that reduces a potential IHT bill could create an income tax liability, affect the future growth of your retirement savings or simply leave you with less money available later in life.

Instead, it may be worth reviewing how your pension fits alongside your other assets. For example, you might want to consider whether the order in which you draw from pensions, ISAs and other investments still makes sense.

You may also want to explore whether making gifts during your lifetime could form part of your plans, taking the relevant rules and allowances into account. The right approach will depend on your assets, income needs, family circumstances and what you ultimately want your money to achieve.

Make every pension decision count

April 2027 may still feel some way off, but estate and retirement planning are rarely things you want to rush. Whether you’re approaching retirement or you’ve already built up significant pension savings, there are some important questions to ask yourself:

• How much of your overall wealth sits inside your pensions?
• Who would you like to benefit from it?
• How much income are you likely to need throughout retirement?
• And could the new IHT rules change the way you use your different assets?

At Wesleyan Financial Services, our experts can help you review your retirement income strategy and explore your options for passing on wealth. Get specialist guidance designed for dentists today.

Please note: charges may apply. You will not be charged until you have agreed to the services you require and the associated costs. Learn more at www.wesleyan.co.uk/charges.

This article is sponsored by Wesleyan Financial Services.