For years, pensions were seen as the most tax-efficient way to pass wealth to the next generation. But the rules are changing, and there are pitfalls many families overlook, from inheritance tax (IHT) exposure after 2027 to poor beneficiary planning.
It’s easy to think of pensions as the “perfect inheritance vehicle.” They sit outside your estate, grow tax-efficiently, and can be passed on flexibly. But even before the 2027 changes, there are traps to be aware of when leaving pensions untouched.
1. Inheritance tax after 2027
From April 2027, unused pensions will normally fall within IHT. That means up to 40% of your pension fund could be lost to tax if your estate is large enough. For many families, property and other assets will still drive the bigger IHT bill, but large pensions will no longer escape untouched.
2. Beneficiary nominations
A pension doesn’t automatically follow your will. If you haven’t nominated beneficiaries (or if the nomination is outdated), your pension trustees may decide where the money goes. That can cause delays, disputes, or outcomes you didn’t intend.
3. Complex family situations
Blended families, second marriages, and vulnerable beneficiaries all create additional risk. Without careful planning, pension wealth can end up in the wrong hands or be taxed unnecessarily.
4. Timing and age rules
If you die before 75, beneficiaries may be able to draw the pension tax-free (under current rules). After 75, withdrawals are taxed as income for them. Add in IHT from 2027, and the combined impact could be significant.
5. Overlooking other assets
Many people focus heavily on pensions for inheritance, but forget that ISAs, business relief assets, property, and trusts also play a role. Relying on pensions alone is rarely the most efficient strategy.
Bringing it together
Passing on a pension isn’t as simple as leaving it untouched and assuming it will look after your family. The 2027 inheritance tax change is one pitfall, but so too are poor nominations, outdated wills, and a lack of joined-up planning.
The lesson? Treat pensions as part of your wider estate, not in isolation. Good planning now can prevent nasty surprises later.
Nic Round is a Chartered Financial Planner and Chartered Wealth Manager, authorised and regulated by the Financial Conduct Authority.