Act now to avoid inheritance tax on your pension with this one simple change

Pension savers are being encouraged to switch beneficiaries on their pension paperwork now to protect their retirement pot from inheritance tax for the next 16 months.

When someone starts saving into a pension they have to fill out certain forms. This includes a section on ‘beneficiary nomination’ – essentially telling the pension provider who should inherit their retirement pot when they die.

Many people fill in and forget this part of the paperwork and typically their current spouse is named as beneficiary. But looming policy changes to inheritance tax and pensions mean there is now a roughly 16-month window where pension beneficiary nominations really matter.

One financial advice firm told MoneyWeek it is currently flagging to clients they may want to temporarily change their pension beneficiaries in case they die before April 2027 when the stricter new rules come in and pensions become subject to inheritance tax.

Oliver Saiman, co-founder of wealth manager Six Degrees, said: “Some families may want to temporarily nominate their children – or any other longer-term intended heirs – as pension beneficiaries now, with a view to switching nominations back to a spouse once the new regime starts in April 2027.”

Avoiding inheritance tax on pensions

The guidance comes as new rules mean from 6 April 2027 unused pension funds are due to be brought into an individual’s estate and potentially subject to inheritance tax at 40%. Until then, pensions still sit outside the inheritance tax net.

By changing the nominated beneficiary to your children – or other heirs beyond your spouse – if death occurs before April 2027, the pension can pass outside the estate free of inheritance tax to the next generation.

After April 2027, you can change the nomination form back, often to benefit a spouse, allowing the survivor to access the pension flexibly under the new rules. Spouses inherit free of inheritance tax in any case.

“No assets move and no irrevocable decisions are made – it’s an administrative change that can be reversed at any time – but the timing could materially affect outcomes for some families,” said Six Degrees’ Saiman.

“While investors and families are going through their ’spring clean’ of their personal finances we find that pension beneficiaries is an area that can be overlooked,” he added.

How to save on inheritance tax

Saiman gave the example of a married individual who has a pension of £1 million.

“Normally, if the pension holder dies, it passes to the spouse free of inheritance tax due to the married couples exemption. However, it then forms part of the spouse’s estate on their death, meaning IHT is ultimately paid when the surviving spouse dies (assuming that takes place after April 2027),” he pointed out.

But by temporarily nominating a child – or if there are no children, any one else you would like to inherit – before April 2027, the pension can pass directly out of the estate if the holder dies before that date.

Saiman said: “This avoids IHT on the pension entirely. Before 6 April 2027 when the new rules come into effect, you could revert the nomination back to the spouse, so they retain flexible access to the pension.”

Without the temporary change: £1 million passes to the spouse and is included in their estate, meaning an IHT bill of potentially £400,000 later.

But with the temporary alternative person nomination, £1 million passes outside the estate on death, so there is no inheritance tax on the pension.

“This is purely an administrative change, but the timing can make a substantial difference in some families,” said Saiman, adding “clearly this is applicable only if the remaining spouse is not reliant on the deceased’s pension”.

Family circumstances can change, for example due to death, divorce or remarriage, so it is always a good idea to check your nominated beneficiary is up to date.

How to change your nominated pension beneficiary

Changing pension beneficiaries is usually straightforward – most providers allow you to update nominations online or via a simple form.

The change doesn’t move any money. It just updates who receives the pension when you die. You can switch it back at any time.

To change your pension beneficiary, log in to your online pension account and find the ‘beneficiaries’ or ‘nominations’ section to update details.

Or call your provider to request a new ‘expression of wishes’ form, which you’ll complete, sign, and return, noting that any new form replaces older ones.