Why 2026 is the year to review your pension strategy

Introduction

For many years, pensions were relatively predictable. You built up a fund during your working life and, upon retirement, would typically take up to 25% as a tax-free lump sum while the rest was used to purchase a guaranteed income for life.

However, this approach didn’t always align with the financial reality for most dentists. For example, if you already have secure income from the NHS Pension Scheme, being required to purchase additional guaranteed income from private pensions could result in more income than needed, unnecessary tax bills and surplus cash accumulating in low-interest accounts.

The impact of Pension Freedoms (2015)

In 2015, everything changed with the introduction of pension freedoms. Instead of being required to turn pension savings into guaranteed income, individuals gained greater flexibility over how and when they accessed their funds.

This opened the door to more personalised retirement planning. For example, it became possible to:

• Take only the tax-free lump sum while leaving the remainder invested
• Draw a higher income for a limited period before the state pension begins
• Adjust withdrawals over time to match changing lifestyle needs

For many dentists with private income alongside NHS pension benefits, this flexibility has allowed retirement planning to be shaped around real life rather than rigid rules.

Tax treatment depends on individual circumstances and may be subject to change in the future.

Why pensions became central to estate planning

Alongside flexibility, pensions have historically offered several tax advantages that made them attractive not only for retirement income, but also for passing wealth onto the next generation.

Key benefits have included:

Tax relief on contributions at the individual’s highest marginal rate

Investment growth largely free from income tax and capital gains tax

Pension funds typically sitting outside the estate for inheritance tax purposes

As a result, many advisers have seen cases where individuals (particularly practice owners or private dentists) accumulated significant pension funds they didn’t fully expect to spend in retirement. Instead, those funds were often intended to support dependants in the future.

A major change coming in 2027

From 6 April 2027, the government plans to change how pensions are treated on death. Under the proposed rules, most unused pension funds and death benefits will be included in a person’s estate for inheritance tax purposes.

The intention of this change is to reinforce pensions as vehicles for retirement income rather than long-term wealth transfer. But in practice, it could increase the taxable value of many estates.

For many dentists, pensions and property together represent their two largest assets. Bringing pension funds into the inheritance tax calculation could therefore significantly increase the amount of tax payable when wealth is passed on.

The Financial Conduct Authority (FCA) does not regulate inheritance tax planning and trusts.

Why dentists may feel the impact more strongly

This upcoming change may be particularly relevant for dentists. In recent years, a growing number of dentists have reduced or left NHS commitments and built substantial personal pension funds from private practice income instead.

While these funds are a valuable part of retirement planning, they may now also represent a significant proportion of the estate that could fall within inheritance tax rules.

Every family situation is different, and there’s no single strategy that works for everyone. However, reviewing financial plans ahead of the rule change is likely to be important.

Key areas to consider when reviewing your plans

Take a whole-estate view

It’s important to look at your entire estate rather than focusing only on pensions. Lifetime gifting allowances and other exemptions can sometimes be used to gradually reduce the taxable value of an estate when used carefully as part of a broader financial plan.

Be aware of the £2 million threshold

If an estate exceeds £2 million, the residence nil rate band begins to taper away. For every £2 above the threshold, £1 of this allowance is lost. For a married couple, this means the potential combined inheritance tax-free allowance could fall from £1 million toward £650,000, which may significantly increase the taxable portion of the estate.

Consider income tax as well as inheritance tax

While inheritance tax is often the main focus of estate planning, income tax can also apply in certain situations, including some pension death benefits. Depending on the strategy used, the interaction between income tax and inheritance tax can affect the overall outcome for beneficiaries.

Think carefully before accessing tax-free cash

Taking tax-free cash from pensions earlier than originally planned may have unintended consequences for long-term financial and estate planning. Many pension decisions made at retirement (particularly taking tax-free cash) cannot be easily reversed.

Remember the age 75 rule

Where pension benefits are inherited after the original member’s death at age 75 or older, beneficiaries may be liable for income tax on withdrawals. This is another factor that needs to be considered alongside inheritance tax planning.

Planning ahead could make a significant difference

With the proposed rule changes approaching in April 2027, now may be a sensible time to review how pensions fit within your overall plan.

For many dentists, pension funds represent one of their most valuable assets. Understanding how future tax changes may affect them, and considering potential strategies early, could help avoid costly decisions later down the line.

To speak to a Specialist Financial Adviser from Wesleyan Financial Services about your individual circumstances, simply book an appointment today. Charges may apply.