Legacy: what it really means to leave something behind

In many ways, April can feel like a fresh start. The sunshine has been glorious, the evenings are stretching out and there’s a general feel-good factor in the air. Apparently British strawberries are arriving in the supermarkets early this year – every little helps! 

The new tax year has started too, somewhat less glamorously. But this year, the fresh start comes with something else: a countdown.

From 6 April 2027 most unused pension funds will be included in your estate for Inheritance Tax (IHT) purposes. This isn't a proposal or a consultation, it’s now law, and it represents one of the most significant changes to estate planning in a generation.

This is why I'm going to be writing a lot about legacy this year. Not because I want to alarm anyone, but because this is an area where preparation genuinely makes a difference. Twelve months is enough time to prepare well, if you start now.

What's actually changing?

Until now, pensions have sat outside your estate for Inheritance Tax - if you died with money left in your pension, it could pass to your beneficiaries without being subject to the 40% IHT charge. This has been a cornerstone of financial planning for decades and why many peoples’ strategy in retirement would have been planned around this - spend other assets first, leave the pension untouched, and let it pass tax-efficiently to the next generation. Simple.

From April 2027, that changes. Unused pension funds will be added to the value of your estate when calculating IHT. This means there could be a hefty IHT bill - if the combined total exceeds the available allowances - the nil-rate band of £325,000, plus the residence nil-rate band of £175,000 where applicable - the excess will be taxed at 40%.

The government estimates that around 10,500 additional estates will face an IHT charge each year as a result. And for those already above the threshold, the bill could be substantially higher than expected.

There are some important details worth knowing. Pensions left to a surviving spouse or civil partner remain exempt. Death-in-service benefits paid from a registered pension scheme are also excluded. And the existing rules around income tax on inherited pensions still apply - so if you were over 75 at the time of death, beneficiaries will also pay income tax on any pension income they draw. The government has introduced provisions to avoid double taxation on the same funds, but the combined effect is still significant.

The industry has raised concerns about - in particular about the administrative burden on grieving families, and about the potential for double taxation. Some concessions were made: personal representatives will have more flexibility around timelines, and death-in-service benefits were given a wider exemption. But the core change - pensions inside the estate for IHT - is confirmed.

What ‘legacy’ really means

When most people hear the word ‘legacy’, they think about the money they’ll leave behind, or their Will. But in my experience legacy is less about the numbers and who gets what – it’s actually about clarity.

It's about whether your partner knows where to find the paperwork, who to call, what the plan actually is. It’s about whether the people you love most are protected - not just financially, but emotionally - when you're no longer here to explain. It’s about whether your family knows what you want. Whether your children understand how the estate is structured, and why.

The families I work with are often navigating complexities in the sense that real life is complicated. There might be multiple generations involved: a parent with declining health, a business that's been sold, or is about to be, a second marriage, children from different relationships or adult children who've never had a conversation about money with their parents. 

Previously the pension that was quietly doing its job in the background is now suddenly part of the conversation, which shines a light on an area that was always there. The question of what you want to leave behind - and how clearly you've communicated it - matters regardless of the tax rules, but the tax rules do create urgency. And urgency, used well, can be a gift.

Two audiences, one message

If you're reading this and you're the one with the pension and the accumulated wealth, this is your prompt to review your situation. Not to panic, but to check: does your plan still make sense in light of the changes? Are your beneficiary nominations up to date? Does your will reflect your current wishes? Have you thought about how your pension interacts with the rest of your estate?

And if you're reading this as someone's child - an adult child, perhaps in your thirties or forties or fifties, watching your parents get older and wondering what the plan is - this is your prompt to start the conversation. Not the money conversation, exactly, more the clarity conversation where you ask: have you spoken to someone about this? Do you have a plan? Can I help?

These conversations are hard, but they're a lot easier to have now, with twelve months on the clock, than at the time when the situation becomes more urgent and therefore less flexible.

What comes next

This is the first in a series of posts I'll be writing throughout the year, all anchored to this theme of legacy. Over the coming months, we'll explore what it looks like to have these conversations with your family, how to think about retirement spending when your pension is now part of the IHT picture, what business owners need to consider as they approach exit, and how to plan for incapacity, which is another area of legacy that nobody wants to think about, but everybody needs to.

I'll also be writing regularly about investing, specifically, about the evidence-based approach we take at 56 Wealth, why it matters, and how it connects to the bigger picture of building and protecting wealth for the people you care about. More on that soon.

For now, though, I’d like to leave you with the idea that legacy isn't just about the money you leave - it's about the clarity you create while you're still here. And this is the year to create it.

If you've been meaning to review how your pension sits within your wider estate, this is the year to do it. Please get in touch - I'd love to help.