Protecting your pension: How the new Inheritance tax rules will affect doctors

The UK Government’s upcoming changes to Inheritance tax (IHT) treatment of private pensions, coming into effect on 6 April 2027, are set to reshape how doctors approach estate planning.

Historically, private pensions have often passed to beneficiaries free from IHT. But under the new rules, most unused pension funds and death benefits will be included in the value of a taxable estate, potentially exposing them to the 40% IHT rate above current thresholds. For doctors balancing NHS and private pensions, this is a shift worth preparing for.

What’s changing?

While NHS pensions will mostly remain outside the taxable estate, private pensions will now generally be subject to IHT. This distinction highlights the need to review your full retirement and estate planning strategy. It’s essential to understand how each component of your savings is treated under the new rules in order to protect the wealth you’ve worked hard to build.

Under the proposed changes, the value of a person’s private pension will be included in their estate for Inheritance tax (IHT) purposes. This means it will be added to the value of all other assets, such as property, savings and investments – when calculating the total estate on death.

This change could have a significant impact on the Residence Nil Rate Band (RNRB). Everyone currently benefits from a standard nil rate band of £325,000, but this can be reduced by gifts made within seven years of death. The RNRB provides an additional allowance when passing on a main residence to direct descendants, but it is means-tested.

Once an estate exceeds £2 million, the RNRB begins to taper away, and including private pensions in the estate calculation could push many estates over that threshold, leading to a partial or complete loss of the allowance.

Under the proposals, executors or personal representatives will be responsible for reporting the value of any unused pension and paying the associated tax to HMRC. Pension providers, however, will have the duty to supply accurate pension value information to make sure estates are assessed correctly.

How to protect your pension?

There are several strategies doctors can consider to reduce their IHT exposure. In their latest article,^[1] expert healthcare financial advisers Chase de Vere recommend taking the following three steps:

Assess your current estate plan

Evaluate how the inclusion of private pensions in your taxable estate from April 2027 will impact your overall IHT liability.

Explore alternative strategies

With private pensions becoming subject to IHT, other methods to mitigate tax exposure include:

Lifetime gifting: Making substantial gifts to beneficiaries at least seven years before your death can reduce the size of your taxable estate. Taking a pension commencement lump sum from your private pension, tax free, and gifting it could be an efficient way to reduce the value of the fund that is subject to Inheritance tax.

Utilise exemptions: Regular gifts from surplus income can be exempt from IHT if they meet certain criteria. This can include contributions made to pensions for children, or grandchildren, reducing the taxable value of the estate, attracting relief on the contribution and thereafter growing in a virtually tax-free environment.

Establish trusts: Placing assets into trusts can help manage and protect wealth for future generations, potentially offering IHT advantages.

Consult a financial adviser

Engage with a professional experienced in medical professionals’ estate planning to tailor strategies to your specific circumstances and ensure compliance with evolving tax laws.

A note on trusts

Although trusts are a useful tool for estate planning, because they keep assets outside beneficiaries’ estates and exclude them from means-tested benefits calculations, they do not completely eliminate IHT. Trusts are subject to their own IHT charges, including:

Entry charge when assets are placed in the trust
Exit charge when assets are distributed, and
Ten-year charge if the trust continues over time.

Understanding these charges is crucial when considering trusts as part of an estate plan. You can find out more about trusts here.

Seek expert guidance

Navigating these Inheritance tax changes can feel complex, but you don’t have to face them alone. Our team works closely with independent financial advisors to help doctors protect their wealth and plan effectively for the future. We can advise on the use of trusts and estate structures so that your private pensions, NHS benefits and wider assets are aligned with your long-term financial goals and the evolving inheritance tax landscape.

References

^[1] Chase de Vere, Preparing for Change: How New Inheritance Tax Rules on Private Pensions Will Affect Doctors’ Estate Plans, 22 January 2025.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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