There’s a shake-up coming in the way pensions are taxed when passed on to the next generation.
Announced by Government in 2024, the changes stand to affect millions of individuals and families across the UK who’ve harnessed private pension schemes as a powerful and tax-efficient method in which to save for the future and eventually pass on their wealth.
While most pensions have historically sat outside the scope of Inheritance Tax (IHT) – making them a cornerstone of many estate planning strategies – that’s set to change from April 2027.
The reforms will bring unused pension pots into the IHT net – with far-reaching implications. Wide swathes of savers could be impacted – particularly those who wish to pass on substantial retirement savings to family members.
But you can take action now to mitigate the impact of IHT on your pension savings. Below, we’ll break down the new rules and the steps you should consider before it’s too late…
The current guidance on pensions & IHT
Under the current rules, defined contribution pensions, including personal pensions, SIPPs, and workplace schemes, can be passed on with tax advantages:
- If you die before age 75, your beneficiaries can inherit your pension tax-free. There’s no IHT, and withdrawals are free of Income Tax.
- If you die after age 75, pensions are still not subject to IHT, although any withdrawals made by your beneficiaries are taxed as income at their marginal rate.
- In many cases, pensions are not included as part of your estate for IHT purposes at all.
What’s changing in April 2027?
From 6 April 2027, the Government will include unused defined contribution pensions within a person’s estate when calculating IHT. In practical terms, this means:
- Any remaining pension funds at the time of death will be counted towards the value of your estate for IHT purposes.
- If your total estate exceeds the IHT threshold (typically £325,000), beneficiaries could face a 40% tax charge on the value of the unused pension.
- This change applies regardless of your age at death – the distinction between dying before or after 75 will still affect Income Tax treatment, but not IHT.
Who will be most affected?
People who’ve actively used pensions as a tax-planning tool are likely to be impacted more significantly, especially:
- Individuals who have preserved their pensions in order to pass them on tax-free.
- High-net-worth individuals who have structured their finances around minimising IHT exposure by using pensions and drawing income from other sources.
- Families who are expecting to inherit significant pension wealth as part of a broader estate.
Key steps you can take to prepare
Review your estate plan
The first port of call is always to take stock of your current arrangements. Months or years may have elapsed since you assessed your overall financial position and estate planning goals, and these may have altered greatly since your last check. Consider the pension schemes within your estate: if they form a major part of the overall estate, they are likely to be included for IHT purposes and may be subject to unexpected tax liabilities.
Consider drawing pension income sooner
Rather than preserving pension pots until death, it may make sense to draw a greater amount of income during your lifetime. This can reduce the size of your taxable estate, especially if you use the income to make gifts (which may fall out of your estate after seven years), or simply to support your lifestyle and spend the funds yourself.
Think about lifetime gifting
Drawing funds from your pension and making gifts during your lifetime may be a tax-efficient strategy, particularly if you’re confident the recipients won’t need to pay IHT on those gifts. There are thresholds that allow you to gift a small amount each year, and no tax is due if you live more than seven years after giving them. Gifting can be a good way to satisfy dual objectives: supporting younger generations and managing your estate size.
Integrate your pensions into wider estate planning
Rather than treating pensions in isolation, it’s important to look at the bigger picture. How do your ISAs, property, business interests, and savings interact with your pension? A coordinated financial plan can help you balance income needs with tax efficiency and legacy goals.
Speak to a professional
IHT is a complex area – and with these changes, it’s only getting more complicated. Speaking to qualified tax and financial advisers can give you a well-rounded viewpoint and help ensure you’re making the most of available tax planning strategies, and avoiding potential pitfalls.
Why IHT tax planning expertise matters
The changes to pension tax treatment are a reminder that longstanding assumptions about IHT can no longer be taken for granted. For years, pensions have been a relatively safe and tax-efficient way to pass on wealth. But as the rules evolve, so too must your planning.
Whether you’re approaching retirement, already retired, or helping older family members plan their affairs, now is the time to review your strategy. With the right advice and forward planning, it’s still possible to protect your legacy and pass on wealth in a way that’s both efficient and aligned with your wishes.
Remember, our expert tax advisors here at Champion are on hand to support you with responsive, future-looking tax planning that’s built around your individual wishes and needs. To speak with a tax planning professional, please contact Gill Molloy, Group Tax Partner on 0161 703 2500 or email gill.molloy@championgroup.co.uk.
