From 6 April 2027 most unused pension funds count towards the estate for inheritance tax. What that changes for mortgage clients who planned to pass their pension on, and where an introduction fits.
From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of a person's estate for inheritance tax. Until that date, a defined contribution pension has generally sat outside the estate, because the scheme decides who receives the money on death.
Some things stay the same. A pension left to a spouse or civil partner is covered by the spouse exemption, as other assets are. The government has said that death-in-service benefits paid from a registered pension scheme are excluded from the change. Where the pension holder dies after age 75, the beneficiary still pays income tax on what they draw from an inherited pension, so some inherited pensions will face both taxes.
The nil-rate band remains £325,000 and the residence nil-rate band £175,000, and a surviving spouse or civil partner can use any unused share of both. The residence nil-rate band is withdrawn gradually for estates worth more than £2 million. From April 2027, pension funds count towards that £2 million.
Some clients with a mortgage and a pension have planned to spend other money first and leave the pension untouched, because the pension passed outside the estate. That reasoning shaped decisions you see on your files: clients who kept the mortgage running into retirement and kept the pension invested, or who cleared the mortgage from savings and left the pension alone.
The change may affect those decisions. An estate made up of a family home and a pension fund that sat below the nil-rate bands before may sit above them after April 2027. A couple whose estate was below £2 million may find that counting the pensions takes them over it and reduces their residence nil-rate band.
These are the points on a mortgage case where the change may affect what a client decides.
Whether to draw tax-free cash to clear the mortgage at retirement, or keep the mortgage and the pension.
The client decides which assets to draw on first and which to leave.
Parents planning a gifted deposit may reconsider where the gift comes from and when.
Cover intended to meet an inheritance tax bill may need resizing.
A lifetime mortgage reduces the value of the estate, which is one factor among several in that decision.
Who the client has named to receive the pension, and whether that still reflects their wishes.
Telling a client that the rule changes in April 2027 is a statement of fact. Advising them whether to draw their pension, how to arrange their estate or how much life cover to hold for inheritance tax is regulated pension, investment or estate planning advice. Your firm introduces, and Equity & General advises.
If a client decides, on a planner's advice, to clear their mortgage with pension money, the mortgage side is yours: the redemption figure, any early repayment charge and whether a partial repayment and a smaller loan would suit them. If the planner recommends life cover for an inheritance tax bill and your firm holds the permission, you can arrange it, with the planner's recommendation on your file.
Start with clients on your files where both a mortgage and a pension of some size are in view.
Send a short message that uses a fact from the client's own file and offers an introduction.
If a client asks you about the change, answer with the facts: the date, that most unused pension funds will count towards the estate, that the spouse exemption still applies and that income tax for beneficiaries after age 75 is unchanged. Then offer the introduction.
A form of words: "From April 2027, most pensions left on death count towards the estate for inheritance tax. What that means for you depends on your estate and your family, and it is a planning question I do not advise on. I can ask a planner at Equity & General to look at it with you."
You raise it once, with wording agreed in advance. The client consents to their name, contact details and the reason being passed to Equity & General. A planner contacts them, gathers the facts and advises on the pension, the estate and how they fit together. You follow the introduction in the partner portal and keep the mortgage relationship.
Equity & General Financial Services Ltd is authorised and regulated by the Financial Conduct Authority (No. 474163). Commercial terms for your firm are agreed individually and are not a guarantee of income.
The government has said that death-in-service benefits paid from a registered pension scheme are excluded. Check the client's scheme documents for how their benefit is paid.
A pension passing to a spouse or civil partner is covered by the spouse exemption, as other assets are. The question arises on the second death, when the combined estate passes to children or others.
No. Whether, when and how to draw on a pension is pension advice, and the right answer depends on the client's income, tax position and family. Tell the client the rule is changing and offer an introduction to a planner.
A gifted deposit puts a second household's finances on your file. What the lender needs from the parents, what the gift does to their estate and retirement, and how to introduce them.
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Clients plan to use pension tax-free cash for a deposit or to clear a mortgage. How tax-free cash works, what taking it can set off, how lenders treat it, and where the pension decision has to come first.
Read itYour firm keeps the mortgage and protection advice. Equity & General gives the pension, investment and estate planning advice, and a named partnership manager sets the arrangement up with you.