This time next year a seismic reform to the retirement system takes effect. 

From 6 April 2027, unused pension savings will enter the inheritance tax (IHT) net, a policy that’s already reshaping how people interact with their investment portfolios in later life.

The long and short is that leaving a pension pot to anyone who isn’t a spouse or civil partner will no longer attract IHT relief and could also create an administrative maelstrom. As IHT is applied at a rate of 40% on anything above the amount you can pass on tax free, and if you die after age 75 withdrawals are taxed at the beneficiary’s marginal rate, HMRC can take a large bite out of a loved one’s inheritance. 

Investors impacted by the change are, understandably, seeking to get ahead of the game. A poll last year by interactive investor found retirees are planning to withdraw more from their pension savings than originally intended and either spend or gift the money.

This is one of several reasons why the so-called great wealth transfer, with trillions set to pass between generations over the coming decades, has kicked into gear. 

Giving away money or assets while you’re alive can kill two birds with one stone: lower your estate’s tax liability and help younger loved ones navigate the current wave of financial challenges, such as soaring education costs (including tax on private school fees), toppy house prices, and a cost-of-living crisis that stubbornly refuses to disappear.

There are, however, some key things to consider before passing wealth down the family line. The IHT gifting rules are complex in parts, and elders must be careful not to jeopardise their own retirement security in the process. 

It’s also important to watch out for other taxes lurking in the gifting process. Drawing extra from pensions could trigger an unwanted income tax bill, while capital gains tax comes into play when transferring ownership of certain assets, such as shares.

As a result of these factors combined, the role of tax wrappers - notably pensions and ISAs, the two central components of any tax-efficient portfolio - in the retirement and intergenerational planning process is evolving. 

Financial Conduct Authority data shows that since the 2015 pension freedom reforms, most people are choosing to keep their savings invested in later life, commonly using self-invested personal pensions, and draw income flexibly instead of buying a guaranteed income.

With this approach, the responsibility of investing wisely and making sure the pot lasts rests with the investor. For most, the aim is to generate a reliable income that spans the duration of retirement, however long that may be.

This is why retirees may wish to consider investment trusts: they can hold back some of the dividend income they receive in good years to support less fruitful periods, helping to provide a robust and sustainable later-life income.

There are attractions here from an IHT-planning perspective, as adopting an income strategy that holds up over time that can make it easier to identify potential surplus wealth to be passed on.

As the money moves down the family line, provided the recipient does not need the cash immediately, pensions and ISAs can continue to play an important role.

When funding gifts from taxable pension withdrawals, one strategy to offset the HMRC bill is to pay into an adult child’s pension, provided they’re happy to wait until age 55 (rising to 57 in 2028) to access the funds. That’s because third-party pension contributions not only attract instant income tax relief at the basic rate, but the recipient can also claim extra tax back via self-assessment if they’re in the 40% or 45% bracket. 

In some scenarios, it can make sense to skip a generation. While only parents and legal guardians can open a Junior ISA for a young child, anyone can contribute once the account is live; a way for grandparents to thin a looming IHT bill and provide grandchildren with a valuable nest egg to financially support them from age 18.

We should note that family units each have their own unique circumstances and needs which will inform the best estate planning strategy. One final point is that it helps to have a decent grasp of the IHT gifting rules before parting with your wealth (or seek advice if you need to) as some gifts are immediately tax free while for others you must survive seven years.

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Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.