Are your clients ready for the 2027 pension changes and their inheritance Tax (IHT) impact?

This podcast is provided for advisory professionals only. Welcome to the Transact Podcast, the audio series hosted by Transact's very own experts. In this episode, Stuart Fleet, head of distribution and Tash Walker lead technical consultant, explore how the inclusion of pensions in his states from 2027 is changing inheritance tax planning and why trusts are becoming a powerful alternative, offering flexibility, control and smarter ways to pass worth efficiently to future generations. Subscribe to the Transact Podcast on Spotify or Apple Podcasts and follow Transact on LinkedIn. Hello and welcome to the Transact Podcast. I'm Stuart Fleet, I'm head of distribution and today I'm joined by Tash Walker and we'll be talking about a lot of the recent changes to the budget and how that is impacting financial planning. So Tash, welcome to the podcast. Hi Stuart, great to be here. Now, Tash, before we dive in, why is 2027 such a significant date for anyone with a pension, especially around a state planning concerns? Well, I think it's a question that most people are aware of at the moment, but there's no harm in reiterating why this is such an important point. In 2027, next year from April, pensions, except for those that are exempt, are going to become a part of the estate when it comes to inheritance tax, which is going to have a huge impact on people when looking at some of the statistics. I think it's going to increase all the way up from about 18.8% with a liability for inheritance tax, which is going to have a huge impact on a lot of people who just didn't expect to have an inheritance tax issue on death. And a lot of this came out of the autumn budget in 2024, wasn't it? What was the main sort of inheritance tax amounts and outcomes that came from that? Yeah, so we had the budget in 2024. Now, the autumn budgets are becoming a bit more of a focal point to the fiscal year as opposed to the tax year end and how that used to be. And 2024 was a really, really big one. Huge announcements came in around APR and BPR restricting 100% relief down to 1 million. That's now been increased to 2.5. And there were also some changes around what the excess over that amount was. So that's going to be 50% relief. And then we're also some changes around AIM shares too, losing their inheritance tax exemption, but still getting a 50% relief. But with all of those things happening, the really big focus and further clarity came in last year and the 2025 budget was around the pensions. And that is that unused pension funds will be included in the deceased estate for inheritance tax. And that's just huge. It's just going to have a huge impact on so many people. I've been talking to lots of advisors about this and they've got three main clients, if you think about it. The number one client who uses a pension literally for retirement, just to put the money into it and then leaving whatever's left when they die to the next generation, they're now going to be caught with an inheritance tax issue that they just were not expecting. The middle client who maybe is a small business holder or business owner who is putting money into the pension for a safety net to use it if they need it. But if they don't, maybe they sell their business and they generate some cash flow from that for retirement, they can then have that pension already outside of the estate and leaving it to the next generation. And then the third client, those high net worth clients who don't really need the pension at all, they've got plenty of other revenue streams and all three of these clients are going to be significantly impacted by this change with the inheritance tax liability going up. That's interesting, Tash. So obviously bringing the unused pension funds into the IHTS state, obviously that's kind of a big change in the planning landscape for advisors and their clients, isn't it? No wonder if that's so, maybe we could elaborate a little more in terms of the discussion that you're having with those advisors. Yeah, definitely. It's having a really big impact on people. There are advisors, quite a few advisors now that I'm speaking to are talking about putting a calendar alert in their diaries for March 2027 and doing a massive sweep across all of their clients and what their death benefit nominations are. And this is a really important point actually because if you leave your pension into your spouse or your civil partner, then that maintains the inheritance tax exemption and is not going to be caught by part of the estate. So there's further planning now that sort of needs to be done in your lifetime with the pension benefits, pension death benefits that you might not have considered. Maybe you were just leaving them to your children or your grandchildren, but we're also seeing people start to look at that pension and plan for what they're going to do with it outside of using it for retirement. And that is things like taking the tax free cash, reducing down the value of the pension and therefore the estate by taking that tax free cash and thinking about giving it away. That is a really, really prominent piece of advice that people are thinking about giving it directly to someone if you're happy for them to have it. But a much more common conversation that's happening right now is trusts and trust planning. And then the third thing that people are really considering and there's a lot of attention around this is the gifts out of normal expenditure rules. So that's where you can give money out of your income if it's in excess of what you need. And so people looking to maybe start taking and drawing down from their pension income, paying the tax, the income tax on that and then giving that money away, which is all exempt from for inheritance tax if it's regular, if it is in excess of what your needs are and what those clients are doing is thinking, okay, well, I maybe I'll be paying 20% tax on this, maybe a bit less if it's a marginal rate. But that's a hell of a lot less than the 40% tax that my estate are going to have to pay when I die. So there's lots of these things to be considered and actually that reminds me of a conversation I was having with an advisor a couple of weeks ago, which was about exactly that was about do I want to pay the tax in my lifetime to reduce the tax that my beneficiaries will have to pay after I die or do I just want to live and enjoy my life and leave them with the tax liability on death. So lots of conversations and questions from many different angles around this. And you mentioned before you're talking about obviously the figures of the number of households, this impacts. So I know that we've worked closely with the company called trajectory on sort of this area of IHT and the impact of it and I saw that obviously the Sunday Times also covered it in the front page of their money section as well. But what does the data actually show about how many UK households could become liable once this pinching mouth is included? Yeah, so when you look at the data, it goes all the way back to AIDA. So 2006, 2008 in the fact they have different waves basically of the impact of the total liability on a household. And it's about 6% back at AIDA when all of those big changes came in when the relevant property regime came in and all of those things. And you see this going up incrementally, not too significantly all the way up to 2014, 2016. And that's the liability is about 9.4%. But then this is when you had the introduction of the no rate ban, the residents no rate ban. So that bringing in that expanding the no rate ban is available up to potentially a million if you're passing it to surviving spouse or civil partner. So you see the reduction or the liability of households to inheritance tax going down again. And then if we look at the example of it at the most recent figures, which is 20 to 22, it's an increase from 6% to 18.8% when you include the pension as part of that. I think that is so significant, isn't it? That's nearly that's over 12% more people being included when it comes to inheritance tax liabilities, which which were before. And I think what this what this is really telling us is a couple of things. Number one, there's a lot of people out there who need advice, who have never even thought about having advice. And there's a lot of people out there who are going to need to have really extensive conversations around intergenerational wealth planning, where they were just relying on that pension to do that work for them before. And I think that's a really important point because we know that only around 8% of our households are actually receiving advice at the moment. And I do wonder how much this is actually landed with the general public. I know that obviously there's been coverages in sort of the press, but a lot of it I think covered on sort of other areas rather than this. And I think it's speaking to our own family members that don't work in financial services. They're always disbelieving of sort of when I sort of talked about the sort of the impact of it. But I think as people get closer to that point of retirement, dual point I think it's going to be more and more impactful. And I suppose this is the challenges that I suppose in the past. Pensions often have described a sort of second forget planning tool. Yeah. Obviously that description is now going to hold after April 2027. Yeah, and I think that that's a really important point that you're raising there, too, which is that lots of people may have read it in the press, especially with all of the sort of the headlines that flying around in the run up to the budget and after the budget. It's a real point of interest in the media, isn't it? And you see a lot of conversations and a lot of scare mongering and fear from clients who are engaged around that. But that's not the majority of people. The majority of people aren't necessarily engaged in what's happening when it comes to their finances until the point that they need to access them or do something about it, which if you use the example that you were just talking about is retirement. And of course, when you are taking money out of your pension or you're wanting to reduce down the value of your estate and gifting that money away to trust or to another person, unless it's your spouse or civil partner or it's to charity or a political party, you have what's called the seven-year rule. So it doesn't just fall out of your estate straight away. There is time and there is planning needed because it takes seven years and sometimes even 14 for it to leave your estate entirely. And that's a really important point for us to think about. And I suppose that obviously in this new one, are there still some narrow iht exemption. that will still exist for pensions after the changes? Are they meaningful enough to make a difference? Yeah, I mean, I think it's, I sort of touched on them a bit earlier, but it is important to recognise that not all planning, not all pensions, sorry, are caught by this. You've got anyone who's leaving a pension to a Spasal Civil Partner, that's going to be exempt under the inheritance tax rules. Charity lumped some death benefits are also exempt and the amount of money that you leave to charity does count towards that 40% figure to reduce down your inheritance tax liability if that's something that you're wanting to do. You've got dependent scheme pensions that are exempt, death and service benefits. Also, joint life annuities and there is probably a whole other podcast in how annuities are going to be impacted by this. But then if we sort of take a step back and think about the other exemptions that you have when it comes to inheritance tax that are out there, that's a really important thing for us to keep in mind, which is your £3,000 annual exemption every year that you can give away. If you don't use it, you roll it over to the next year, that's £6,000. Lots of people forget about that and that's a really important thing to keep in mind. I've spoken about the normal gifts out of normal expenditure rules. That's a really important one to keep an eye on. And I think lots of people will be leaning into that, whether we'll see the government start to look at that with more of a microscope. I don't know how any time will tell. The key thing is on that is that record keeping is essential. It's only assessed after death. So keeping a record in your lifetime makes it easier for your executors to claim that exemption. It has to be regular. Lots of conversations asking what regular is. And HMRC on their website and their manual named three years. So that's a strong indicator that we can look to. And then you've also got your £250 annual exemptions of gifts that you can make to anyone. So I could give you £250 and you could give me £250. And we'd be fine. Thank you very much. It's a great plan. I'm a space that when I'm talking to advisors and they're talking about their clients, obviously, there's often a big need for those clients that want both income during their lifetime. And also they want IHT efficiency on death. And what options have they got sort of in this sort of post-2027 world? So this is a really important point. And it's certainly an area that we're seeing a lot more focus on app transactions from advisors and clients looking to replicate. Not exactly, but almost that pension environment. Which is you put money into the pension. You know it's outside of your estate. And it goes down to the generations to whoever you leave it to, brilliant. But if you need it, something goes wrong in your lifetime or you just don't want to fully lose control, you can take the pension. You've got your tax week, actually, you've got your income. So it's this amazing piece of tax planning. The pension is a really great was or is until 2027, a great vehicle for this, investment vehicle. So what people are looking at instead? Within trust is how can I replicate ish that similar environment? And what that key thing is is that when you give money away to make it inheritance tax efficient, it's irrevocable. So you're giving that money away. And usually with a trust, you can't, as the settler, the person creating the trust, have access to it. Because that's not effective for inheritance tax planning. And the government wouldn't see the other rules. HMRC doesn't see that as a gift for inheritance tax. So it's still part of your estate. So how can you mitigate that? How can you get around that? And there's three main kinds of trusts that sit on top of like a discretionary trust, which is just a structure of the trust. And then you've got these frameworks that sit on top. And the three trusts are having a lot of interest at the moment because of these changes. And actually there was more interest going towards trusts anyway. But it's the gift and loan trust, all loan trust, the discounted gift trust and the flexible reversionary trust. At the moment at Trans Act, we've got our gift and loan trust and we've got our DGT and the FRT that we are building at the moment is going to be launching very soon, actually, in a couple of months. I think that sounds good. So I suppose, obviously, for advisors that have worked in pensions and ISIS and general investment accounts, we'll see that there will be advisors that maybe a less experienced with trust. And obviously, there might be looking now at that. Obviously, on Trans Act, we are fortunate that we have an in-house onshore bond and an in-house offshore bond. Obviously, the offshore bond is Isle of Man. And we have two life companies that allow us to offer those products. But for those advisors that maybe haven't been, say, familiar with trusts, could you explain on the first one you mentioned the gift and loan or the loan trust? How does that work? And what makes it effective as an estate planning tool over time? Yeah, sure. So let's say that all of these, all of these trusts I'm going to talk about are sitting on top of a discretionary trust. So that's just a trust which is created by an individual where they give money to trustees and the trustees at their discretion can distribute the capital and the income in line with the classes of beneficiary. There's usually lots of different classes. Standard discretionary trust has children, grandchildren and remote to issue. That means people yet to be born. So just let's set the scene of that framework first. And then if you put the gift and loan trust over the top of it, what you're doing is there's a gift, it can be nominal, it needs to be £10. It can be much larger as well. But the key thing with this is that you are making an interest-free loan as the settler to the trust and all of the growth on that loan is outside of the estate and is trust property, which is really effective and in great planning. Because also what you get to do is withdraw that loan as and when you need it, which is this sort of idea of providing inverted commas income for the settler, thinking about replicating that sort of pension environment. It's not income, it's a return of capital because like you said, stew investment bonds sit within this structure. But what you're getting to benefit from and what the trust is getting to benefit from is all of that growth that's happening across those years. Some people make the loan to the trust and they never take it because it's that safety net. Maybe they didn't know if they'd need it or not. And then six years into that trust, they realise they don't need that loan. And so they waive it. And the money stays in the trust and it becomes a gift from that point. And the seven years start going onwards. Other people do draw it back and they draw it back. Regular income, it could be monthly, annually, ad hoc. And they can draw up to the value of the loan and know more than that. But what it does is it allows the money, the loan to be doing the work of growth and that growth being part of the trust and outside of the estate while still allowing you as a settler, the safety net of being able to draw on it when you need it. And then of course, waive it when you don't need it anymore. No thanks, Tasha. And then I think the other one you mentioned was you mentioned the discounted gift trust. So how does that discount mechanism actually reduce someone's taxable state? So the discounted gift trust is underwritten, which means that the settler, and it can be joined life as well, the settler is underwritten. So there's a medical questionnaire that's done and the underwriters determine how healthy you are and therefore how old you are. So you get an age rating, it's called. So if you are the age that you are, your age rating would be zero. If you are five years, when it comes to health older, then you actually are, then you'd get a plus five age rating. So based on your age rating and on how much you're wanting to withdraw from the DGT, when you create a DGT, you set up what's called periodic payments. Now these are fixed, not like the loan trust where it's completely up to you how and when you take it. These periodic payments are fixed from the outset and can't be changed. So let's say you want to take 10,000 pounds every year and you're in good health and you're looking like you've got a good chunk of time to live. You may then because of those two things, effectively how much you're going to be taking out of the trust and how long you're likely to live give you a discount. So maybe you get 50% of a discount on the gift. So what that means is let's say you're putting 600,000 pounds into a DGT. You get a 50% discount based on how healthy you are and those periodic payments that you're going to take and you have to take until you die. The discount is effective immediately. So that gift of 600,000 pounds in this example becomes 300,000 pounds from the day the trust is created. Now you could accidentally die the next day unintentionally something horrific happens but it's only the 300,000 that would form part of your estate and of course 300,000 is below the no rate band. So assuming you've got no other gifts or anything like that then that there would be no inheritance tax liability. So it's amazing. It's a really, really great piece of trust planning but it's rigid. You can't later decide I don't need the periodic payments now I want to change my mind and of course all of those periodic payments that are coming through are coming back to you and therefore coming back into your estate. So it is really about looking at what you need for how long and are you sure of how much money you'll need over that longer period of time and maybe the DGT is a really good piece of trust planning for that. Well that probably leads us on to the next one. So really exciting to hear that we're working on a flexible reversionary trust. So how does a flexible reversionary trust differ from a discount to give trust or a loan trust and where might it be a better choice for clients? This is a it's a really great offering in comparison to the other two. The loan trust don't forget that loan is still part of your estate on death so it's included in the value of your estate. The DGT it's out and you got that amazing discount but all of those periodic payments are coming down back into your estate. The flexible reversionary trust is a really attractive third offering. It's not underwritten so there's no discount but when you create the flexible reversionary trust. trust, you are creating the option of what's called a reversionary interest. So it is the option to take a certain number of segments or policies up to a value. So let's say you choose to take 10,000 pounds every year. And what will happen is that at that point in time, the option to take that money or the to take those segments will arise. And you as a settler can say, you know what, actually, I do need that right now and you take it, but you can also say no. And if you say no, then it falls back into the trust, it doesn't accumulate. So it's not a cumulative allowance that if you've not taken it one year, you get double the next. It is just an option that arises year on year on year. But it's really effective because it is that safety net. And when we look at the pension and we look at what that does and what that provides at the moment, is the option to take income or tax recash if you need it. But if you don't, you can keep it within that pension environment that's outside of the estate. Obviously, this is changing in 2027. So if you look at the frt, you're putting money into the Flex borrower version we trust, a discretionary trust. But if you need it, every year at one point, you will have the option, you will have that safety net come forth and say, do you want to take these segments? Do you want to realize these now? And you can. And then of course, that becomes part of your estate. But it gives you this flexibility. And it gives you the opportunity to consider whether you actually need it or not. And I think that's a key difference between the DGT and the GIFT and loan trust that the frt really provides a much more useful option. And if you look at the comparison of the of the three different kinds of trusts and what's more effective for inheritance tax planning, it will be the frt, you know, unless you're taking those, unless you're taking those segments each time that they're rising, it's not, it's not built for that. So you would have a DGT in that in that case, if you needed that income. But if you're looking to replicate as best you can, a pension environment where you can leave money to future generations, whilst at the same time, allowing yourself a safety net to be able to future proof for your own certainty and your own security, then the flexible version of trust is a really interesting opportunity. And I think you mentioned before, obviously we said about the unsure and offshore bond and my understanding, Tash is that we're off for that on both on sure and offshore bond when we the flexible version of trust. Yeah, we will. And all three of those actually. Yeah. Yeah, okay. So I guess I guess in summary, so obviously we mentioned obviously pension still have place. Obviously we, we haven't covered other tax wrappers like general investment cameras, I says, but we are seeing that growth in financial planning becoming more complicated. And obviously the budget changes is pushing some of that through for us as a platform. So we want to make financial planning easier. So by making as wide a range of tax wrappers, such as on sure offshore bond GAI, so lies the giants, as well as extending out that range of trust again, hopefully that will allow advisors to want to track a lot more business because as we said before, if only 8% of households are receiving advice, a lot more are likely to need it in the coming months and years. And I suppose just to sort of summarize on that point, how can we help advise if they want to dig in a bit further to provide technical support that they can rely on? Definitely. I'm part of the technical team at Trans Act. And there's a whole group of us. There's a telephone number that you can get through to people directly, 02076085330. But you can also contact the technical team through our technical underscore direct at integrity.co.uk email. And we are here to have these conversations that we're talking through right now. These changes are still relatively new, right? People are still getting their head around them. 2024 isn't that long ago. 2027 is certainly not that far into the future. And there is a lot, if anything, that we take from today to consider, you've got the pension changes, you've got the impact of that on people's estates. You also need to, and I didn't mention this earlier, but by pensions becoming part of the estate, this value will be included in your total overall estate when it comes to tapering for the residents in the late band, when it's above 2 million. So there's lots of things to think about here. And if anything, I think now is the time to sort of have those conversations. And we can definitely help with that in the technical team, thinking about what kind of trust might be best suited for your client, looking at the client's individual scenario. What is their tax situation at the moment? What will their tax situation become? Thinking about those seven year, that seven year clock, that 14 year clock, there is a lot, that there is a lot to sort of hold in our heads with all of these rule changes, as well as the complexities of pensions and inheritance tax and the rules around those. So yeah, that's exactly what we're here for to sort of talk through the client scenarios and hear what the advisors are thinking. And to be a place in which they can sound out their ideas and check the technical knowledge around around what they're suggesting planning. Thanks, session. That's what is extending on that is in terms, we know trust can be complicated to set up, obviously, this trust registration service, those making sure you're getting the trustee is completed correctly. We also have field based advisor support managers and business development managers that will be more than happy to come out and help advisors, power planers, administrators to set these up to make sure there's not friction with the client. If it's something that they're setting up in frequently, or they previously haven't done a lot of trust business in the past. Yeah, that's a really good and important point as well, because I think a lot of people will be dipping their toe into the whole trust world for the first time. And it can be intimidating for clients. So yeah, I think that's a really good point. Thank you, Tash. Hopefully everyone from out really insightful. And we look forward to seeing a future podcast. Thanks. Good to be here, Steve. 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