It can feel really good to be able to help your family financially, especially when you can see the difference it makes to their lives. That’s one reason you might choose to pass some of your money on while you’re still alive, rather than leave it to them in your will.
Another reason is the upcoming changes to inheritance tax rules. From 6 April 2027, most unused pension funds and pension death benefits will be included in your estate for inheritance tax purposes so if you were thinking of gifting sooner rather than later and from these funds, now would be the time.
The tricky part is knowing how much you can afford to part with.
We sometimes call this “letting the tax tail wag the dog”. It’s when a potential tax saving starts driving the whole decision. On paper, an option that leaves more for your family and reduces the tax due can seem like the obvious choice. The figures only tell part of the story, though; you also need to consider what giving that money away could mean for your own retirement, both now and later. You still want enough to enjoy your retirement and some room to adjust if your circumstances change along the way.
Your retirement won’t look the same every year
To get a realistic idea of what you can give, it helps to look beyond the value of your pension or savings today and think about how you’ll use your money over time. Your money might be spread across pensions, ISAs, investments, cash and property, and you’ll draw on each of them at different times.
Your spending will change too. You may spend more during the first few years of retirement, when you have the time and energy to enjoy the plans you’ve been looking forward to. Later on, health or care costs could become more important, while inflation will continue to affect the cost of everyday life.
A gift might feel perfectly affordable at 65, but by 85 your circumstances could look very different. None of us knows exactly what we’ll need 20 years from now, so it’s worth giving yourself a bit of room.
Find out what the change means for you
The new pension rules will make a real difference to some families. HMRC estimates that around 10,500 estates with inheritable pension wealth could have an inheritance tax bill they wouldn’t have under the current rules. Another 38,500 could pay more.
Those figures may sound significant, but the majority will still have no inheritance tax to pay. So, before taking extra money from your pension or making a large gift, it’s worth finding out where you actually stand. Moving money too soon could create extra tax, charges or complications elsewhere.
This is where a cashflow plan can be useful. It brings your pensions, savings, investments, property and other income together, so you can see how they might support you over the years. You can also see how the picture changes if retirement lasts longer than expected, prices continue to rise or care becomes part of your spending later on.
From there, you can get a better sense of how much you need to keep for yourself and what you may be able to pass on. You’re no longer relying only on today’s balances or trying to guess what might be left.
Where you take the money from matters too. With the pension rules changing, it may be worth reviewing the order in which you use your pensions, ISAs and other investments.
If you decide to pass money on during your lifetime, you don’t need to settle on a final amount straight away. You could make a smaller gift and return to the conversation later, once you’ve seen how your own finances and your family’s needs develop. This can make the decision feel more manageable, and you can always revisit it if your circumstances change.
What matters is that any gift works for you as well as your family. You want to be able to pass money on without second-guessing whether you may need it later.
If the changes coming in April 2027 have got you thinking about your pension or what you might like to give away, we can talk it through with you and help you work out what makes sense for your situation. Get in touch today.
