or worse, destroy the family business?
From April 2027, unused pension funds could not only increase your Inheritance Tax bill—they could also create serious cash-flow problems for your family and, for some business owners, even put their business premises at risk.
For many years, pensions have occupied a privileged position in estate planning, even back to when I was a practicing IFA 25 years ago.
Many people have deliberately spent other savings first, leaving their pension untouched because it generally fell outside their estate for Inheritance Tax (IHT) purposes. It was often regarded as one of the most tax-efficient assets to leave to children and grandchildren.
That is about to change.
From 6 April 2027, most unused pension funds and death benefits will normally be included when calculating Inheritance Tax.
Much has been written about the extra tax some families may face.
Less attention has been given to a potentially bigger problem.
Where will the money come from to pay that tax?
For many well-pensioned families, and particularly business owners, finding the cash could prove more difficult than calculating the tax itself.
A Valuable Asset That May Not Be Immediately Available
Unlike money in a bank account, pension assets cannot necessarily be accessed immediately after death. Many of them will be property used by the family business.
Under the new rules, pension values must be established and incorporated into the overall Inheritance Tax calculation. Executors, pension providers, professional advisers and HM Revenue & Customs may all become involved before matters can be finalised.
The process is likely to become more complicated and may take considerably longer than under the current system.
Meanwhile, Inheritance Tax generally has to be paid within strict timescales, 6 months from the end of the month following the month the death occured in, with interest accruing on unpaid tax – at 7.75% at the time of writing.
This creates a potential cash-flow problem for many families.
Wealthy on Paper – Short of Cash
Imagine an estate comprising:
- Family home: £900,000
- Savings and investments: £150,000
- Pension fund: £850,000
The estate appears comfortably wealthy.
Yet relatively little cash may actually be available.
If a significant Inheritance Tax liability arises, the executors may have little choice but to:
- sell investments earlier than planned;
- arrange short-term borrowing;
- sell the family home;
- ask beneficiaries to contribute towards the tax; or
- delay the administration of the estate while waiting for pension matters to be resolved.
An estate can therefore be asset-rich but cash-poor.
Business Owners May Face an Even Greater Challenge
For many business owners, their pension fund is not simply invested in shares or managed funds.
A Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS) may own the office, factory, warehouse or shop from which the business trades.
This arrangement has often worked extremely well. The business pays rent to the pension scheme, the pension receives an income, and the property has traditionally sat within a tax-efficient environment.
From April 2027, however, that same property may contribute towards the Inheritance Tax calculation.
This creates an obvious dilemma.
The commercial property may be worth several hundred thousand pounds—or considerably more—but it cannot simply be sold to raise tax without potentially disrupting or even threatening the business itself.
The executors may therefore face a substantial tax bill while much of the estate’s value remains tied up in a commercial property held inside a pension scheme.
The family could be forced to raise money elsewhere, borrow against other assets, or sell investments that the deceased had intended future generations to keep.
In some circumstances, the pressure to raise funds quickly could even affect the future of the business itself.
The Shape of the Estate Could Change
The consequences extend beyond simply paying more tax.
Many people make carefully considered Wills so that particular assets pass to particular beneficiaries.
However, if executors need to raise cash urgently, they may be forced to sell assets that the deceased had hoped would remain within the family.
Investment portfolios may be broken up.
Properties may need to be sold.
Business assets may have to be reorganised.
The estate that beneficiaries eventually inherit may look very different from the one the deceased intended to leave.
Multiple Pension Schemes Add More Complexity
Many people have accumulated several workplace pensions during their careers.
Each pension may have a different provider, different paperwork and different administrative procedures.
Every additional pension means another valuation, another provider to contact and another process to complete.
Consolidating pensions, where appropriate and after taking suitable regulated financial advice, may help simplify matters for those left behind. It is not suitable for everyone, but it is becoming an increasingly important consideration.
Planning Is Now More Important Than Ever
These changes do not mean pensions have lost their value.
They remain one of the most tax-efficient ways of saving for retirement.
However, they can no longer be viewed in isolation from the rest of your estate.
A Will drafted several years ago may no longer produce the outcome you intended.
Beneficiary nominations should be reviewed.
Executors should understand the assets they will be dealing with.
Business owners should consider whether property held within a SIPP or SSAS could create funding difficulties for their family.
Above all, your estate should be reviewed to ensure there will be sufficient liquidity to pay any Inheritance Tax without forcing unnecessary sales or placing avoidable pressure on your loved ones.
The Time to Review Your Estate Is Before the Rules Change
The greatest estate planning opportunities almost always exist during your lifetime.
Once someone has died, the options available to their family become much more limited.
If you have built up a substantial pension fund—or your pension owns the premises from which your business operates—it would be sensible to review your arrangements well before April 2027.
Good estate planning is no longer simply about reducing tax.
It is about ensuring your family, your beneficiaries and, where applicable, your business are not left struggling to find the cash needed to preserve the legacy you worked so