Keeping it in the family: Navigating wealth transfers

The past two Autumn Budgets, in 2024 and 2025, introduced some of the most substantial changes to the UK’s tax landscape in recent years. From IHT on pensions, to revisions to business and agricultural reliefs, alongside the continued freezing of income tax and inheritance tax thresholds, this represents a major shift for planners and clients to navigate.

Initial reactions from many clients and planners were a variation of: “They surely won’t implement all of this.”                    Yet, with only modest adjustments, most of the proposed measures are now proceeding largely as originally outlined.

For financial planners, the technical implications are significant. Decumulation strategies will need to be reviewed and adjusted, gifting will become more prevalent for many, and longstanding assumptions revisited.

However, the technical and planning adjustments are only half of the job. 

Helping clients manage the emotional and behavioural side of these changes will be equally critical. As tax complexity increases, clients need to understand why this requires a change in strategy, which may feel uncomfortable to them. Supporting clients in understanding and accepting this new reality is the essential first step.

Pensions and IHT: The key change for many clients?

With the technical landscape shifting, it’s essential to consider how these changes could reshape real-life planning strategies.

The 2024 Budget announcement brings defined contribution pensions into the IHT estate from April 2027. It’s arguably the reform that has generated the most discussion and airtime.

The crucial part of the legislation is the DC pension being assessed to IHT on death and then, where the death happens on or after their 75th birthday, income tax on the beneficiary on withdrawal. Potentially creating a total tax rate of 64% if the ultimate beneficiary pays higher rate tax.

In addition, it’s widely accepted that the pension will also be included in the estate for assessing the £2 million Residence Nil Rate Band taper from April 2027. If a client’s estate exceeds £2 million as a result of their pension value in 2027, the taper will apply, further increasing the overall tax burden.

How will this impact client behaviour when it comes to retirement planning?

The potentially high tax rates will likely encourage many clients to revisit their decumulation strategies for DC pension schemes, particularly for clients who had intended to treat their pension as an intergenerational trust and rely on other assets to fund their own retirement.

These tax changes will naturally encourage some clients to use their pension for its original purpose: generating income in retirement. As a result, the other assets they had planned to rely on may no longer be needed for retirement funding, and those assets will instead require focused IHT planning.

Naturally, a wide range of IHT planning strategies will come into play, with the right approach depending on each client’s individual circumstances. That said, gifting, particularly through the use of trusts, is likely to feature prominently. A clear understanding of the client’s needs and objectives will be essential in guiding them through this period of change.

Equally, some clients will have their retirement income fully provided for from other sources and therefore have no need to draw on their DC pension at all. For these individuals, the normal expenditure out of income exemption becomes particularly valuable and may form a central part of their estate planning strategy.

Making gifted pension income work across generations

Pension income, whether taken via annuity or drawdown, is treated as income for the purposes of the normal expenditure out of income exemption. This means that, provided the client meets the required conditions, the income can be gifted to the next generation.

Although making withdrawals may trigger income tax, for many clients this represents a worthwhile trade off to avoid a potential double tax charge on death. It also raises a number of further questions, such as:

• Should the pension member pass the funds directly to the next generation?
• Could the beneficiaries use the money to contribute to their own pensions?
• Would a trust structure give the control and protection they desire?
• Could a whole of life policy be purchased to fund the liability?

Exploring these options with the family ensures the gifting strategy genuinely supports their intergenerational objectives.

PCLS and death benefit considerations

There’s also the Pension Commencement Lump Sum (PCLS) to consider. Planning in this area is particularly important, as the PCLS can be drawn tax free during the client’s lifetime, but will still be assessed for IHT on death, and, if death occurs on or after their  75th birthday, the beneficiary will also face income tax on withdrawal.

Is it prudent to draw and gift the PCLS now? If not, when? If so, should it include a trust? What if the client needs the PCLS to fund retirement?

The options are extensive, and the tax implications of choosing the wrong route can be significant. Understanding how the client’s need for pension income intersects with their intergenerational planning goals is essential when designing an effective approach to PCLS, even if the correct option is to do nothing currently.

Finally, attention must also be given to pension death benefits, expressions of wishes, and the potential use of spousal bypass trusts, both before and after April 2027. 

It remains a crucial element of the wider planning conversation, which we have explored in detail in the article linked below.