Guide to navigating the new pension Inheritance Tax rules

How to plan to secure your wealth for the next generation

For years, pensions have been regarded as one of the most effective tools for passing wealth to future generations, offering unique tax advantages unavailable with other assets.

Traditionally, pension funds have been protected from Inheritance Tax (IHT): if you died before age 75, beneficiaries could often receive your unspent pension savings tax-free, and even after age 75, funds were taxed at the recipient’s marginal Income Tax rate rather than at punitive IHT levels. This special treatment has made pensions a crucial part of long-term estate planning for those aiming to leave a legacy.

Reform fundamentally alters how pensions should be viewed

However, the landscape is set to change considerably following the 2024 Budget. The Chancellor announced a major shift: from 6 April 2027, any unused defined contribution pension funds and death benefits remaining at death will be included in your estate for IHT purposes. This means your pension, which was previously outside the scope of IHT, could now be liable for a tax charge of up to 40% if your total estate exceeds the nil rate band. For many families, this reform fundamentally alters how pensions should be viewed within the wider context of inheritance and succession planning, and it introduces new challenges when aiming to maximise what can be passed on to loved ones.

A significant shift in estate planning is on the horizon

Previously, pension pots were usually protected from IHT, allowing them to be passed on tax-free (subject to Income Tax rules).

This upcoming reform signifies a significant shift in estate planning, potentially subjecting children and beneficiaries to substantial tax bills that were once avoidable. While the tax-free lump sum and pension
tax relief remain unchanged, the inclusion of defined contribution pots in the estate demands a complete re-evaluation of how families plan for the future.

Understanding the new tax landscape

To fully understand the implications of these changes for pension holders, it’s important to comprehend how the UK’s Inheritance Tax (IHT) system functions and why its scope is widening.

Inheritance Tax is a levy applied to the value of a person’s estate upon death, covering assets such as property, investments, cash savings and now, with the 2027 rule change, potentially unused pension funds. The starting point is the ‘nil rate band’, currently set at £325,000, which allows you to pass on that amount of your estate tax-free. In the 2025 Autumn Budget, Chancellor Rachel Reeves confirmed that this
threshold will remain frozen until April 2031.

More families entering the tax net

As asset values such as property and investments increase over time, this freeze has already been raising the number of families entering the tax net. Including pension savings in the taxable estate will further accelerate this trend.

Anything above this threshold is typically taxed at 40% upon death. This nil rate band has not increased since 2009, but asset values have grown steadily, meaning more estates are likely to exceed this threshold each year, a phenomenon known as ‘fiscal drag’.

Get in touch

Is it time to reassess both your retirement and estate planning strategies?

For more detailed information, refer to our guide or contact our financial planners to find out how we can help you structure your wealth to guide you towards meeting your objectives. 

Important information

THIS GUIDE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE. THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED. THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE ESTATE PLANNING, TAX ADVICE OR TRUSTS. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

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