Richard Marshall, private client legal director at Hill Dickinson, analyses the changes made to pensions in last year’s October Budget and what it means for GPs, their families and their practice.
For many years, pensions have been one of the safest and most effective ways to save for retirement and to pass on wealth to the next generation. This is why they were deliberately kept outside the scope of inheritance tax (IHT) to encourage saving.
From 2027, this treatment changes, signalling a shift in how pensions are viewed by the Treasury and creating a new challenge for GPs, who often have both NHS and private pension arrangements. This is not just about retirement income but also about how family wealth is structured and how succession within GP practices might be affected.
The current rules
Currently, pensions are outside the scope of IHT. This has therefore incentivised a lot of people to contribute to their pensions as a tax-effective way not only to grow but also to pass on wealth from one generation to the next.
Changes to the rules
From 6 April 2027, the value of unused private pensions will be brought into account for IHT purposes. This means that the value of the unused pension will be added to the estate of the deceased, with any exemptions like the nil rate band (the IHT free allowance, which is currently £325,000) being applied proportionately across assets held in the estate and the pension.
Any IHT attributed to the pension value will then be settled directly from the pension funds.
What this means for the NHS pension scheme
For those in the NHS pension scheme with defined benefits, there will be no changes to this, and the value of any undrawn pension will not be taken into consideration for IHT purposes.
What this means for other pension provisions
If, however, GPs have contributed, or are still contributing to private pensions, then these will most likely be brought into account for IHT purposes from 6 April 2027.
The tax benefits available on pension contributions, together with the income tax and capital gains tax advantages once assets are inside a pension, remain attractive. This creates a dilemma for many GPs: whether to continue contributing to private pensions for retirement growth, knowing that these funds could be included in the estate for inheritance tax, or to adjust contributions to manage potential future liabilities.
A central consideration under the new rules is reviewing any nominations and spouse exemptions for private pensions. Spouse exemption will apply to a pension passing to a spouse, but whether this is appropriate depends on individual circumstances.
For example, if a surviving spouse is unlikely to draw on the pension and it remains unused on their death, then IHT will be calculated on the value at that time. If the surviving spouse is over the age of 75, then any benefit then drawn from the pension by their beneficiaries post death will be subject to income tax at the beneficiaries’ marginal income tax rates. This could be up to 45%, on top of the IHT already paid at 40%.
To illustrate, consider a GP with a private pension of £500,000 left unused at death. From 2027, that sum is potentially subject to 40% inheritance tax, creating a £70,000 liability. If the spouse inheriting is over 75 and the fund is later drawn by children, the combined impact of inheritance tax and income tax could erode almost half of the value.
The key takeaway is that GPs should review both ongoing contributions and the structure of nominations for their private pensions. Planning early allows for more effective management of potential tax exposure while still taking advantage of the tax benefits pensions provide for retirement.
Wider considerations for pensions
While this may not impact all GPs, it could be a considerable issue for older family members who may not yet be aware of the implications of this for their estates. This is especially so for those over 75 in light of the income tax charges on beneficiaries as mentioned above.
It is important to be aware that anyone looking to mitigate their exposure to IHT by withdrawing funds from their pension during their lifetime will be subject to income tax at their marginal rate.
Any such income, however, would likely be treated as excess income, which is something that can then be gifted free of IHT, without the need to survive for seven years like most gifts. Such pension withdrawals could also be used to fund life insurance taken out to pay the IHT liability on death, if appropriate.
For GPs, there is also the practice dimension to consider. Decisions about whether to withdraw pension funds or restructure savings can affect succession planning, particularly in partnerships where personal finances and practice stability are closely linked. Coordinating pension planning with other estate assets such as property, investments and business interests will become more important.
Call to action
Reviewing any private pensions (and discussing this with family members where relevant) is an important first step to understand how the changes may impact your estate. Early consideration can help ensure that decisions around pensions, wealth transfer, and succession planning for the practice are structured in the most effective and tax-efficient way.
