The UK pension landscape is shifting, and high-value pension holders could face unexpected tax bills. Changes to UK pension regulations mean that individuals with over £1 million in pension savings may see a larger portion of their wealth subject to inheritance tax (IHT). Without proper planning, retirees could lose a significant share of their pensions to taxation.
LTA Abolishment and Inclusion of unused pensions in IHT
In April 2024, the UK government abolished the Lifetime Allowance (LTA), which previously capped tax-privileged pension savings at £1,073,100. This change allows individuals to accumulate unlimited pension savings without incurring LTA-related tax charges.
What that means is that for a while, pensions offered a way to pass wealth on to your loved ones, tax-free. However, from April 2027, all unused pension funds and death benefits will be taxable via IHT. So while the removal of the Lifetime Allowance (LTA) allows you to accumulate larger pensions, they may now fall within the taxable estate, exposing them to IHT.
In an attempt to break it down even further, the abolition of the Lifetime Allowance (LTA) and the upcoming inclusion of unused pension funds in Inheritance Tax (IHT) calculations are interconnected changes in UK pension regulations. The LTA previously limited the amount individuals could accumulate in their pensions without facing additional tax charges. Its removal allows for unlimited growth in pension funds. However, starting from April 6, 2027, unused pension funds will be included in the value of an individual’s estate for IHT purposes. This means that while individuals can now accumulate larger pension pots without LTA penalties, these larger amounts may be subject to a 40% IHT upon death if the total estate value exceeds the IHT threshold.
Current IHT Threshold
As things stand, the IHT threshold has remained £325,000 per person since 2009. An additional £175,000 residence nil-rate band applies when passing a home to direct descendants. Together, a couple can shield up to £1 million. Any amount above this faces a 40% tax.
Why Pension Holders Are Looking Abroad
With these changes to UK pension regulations, and many doubting the sustainability of the triple-lock, many high-net-worth individuals are reconsidering their pension strategy. Keeping funds in the UK could mean paying 40% tax on anything above the IHT threshold. To avoid this, retirees are exploring overseas options like Qualifying Recognised Overseas Pension Schemes (QROPS).
A QROPS transfer to India can help pension holders reduce tax liabilities. Since QROPS funds sit outside the UK, they may avoid inheritance tax altogether. This offers retirees a way to protect their wealth while maintaining financial control.
The Time to Act Is Now
While the UK government continues to seek new tax revenue, what many people forget is that it’s quite possible that future pension reforms could tighten rules even further. Frequent changes to UK pension regulations are making long-term planning way more urgent than ever. High-value pension holders should explore QROPS transfers before new policies make it harder to safeguard their wealth.