How pension changes could affect your inheritance tax plans

What’s changing?

From April next year, most unused pension funds and pension death benefits will count towards the value of an estate for IHT purposes.

Traditionally, pension have been designed to provide income in retirement. However, because for decades they have been outside an estate for IHT purposes, some people have used them to pass wealth on to future generations. The forthcoming change is intended by the government to reduce the use of pensions as a vehicle to pass on wealth free from IHT.

IHT is not normally charged on the first £325,000 of an estate, which is known as the nil rate band. Some people can also use an additional allowance of up to £175,000 – the residence nil rate band – when leaving a qualifying home to direct descendants, such as children or grandchildren.

This means that a single person may be able to pass on up to £500,000 without an IHT charge if they qualify for the full allowance.

Assets passed between spouses and civil partners are generally exempt from IHT. Unused allowances may also be transferable, meaning a qualifying couple could potentially pass on up to £1 million without IHT. The amount available will depend on their circumstances. Death in service benefits paid from a registered pension scheme will remain outside the scope of the new rules.

However, more estates are likely to exceed the various tax thresholds when pension wealth is included in the value of an estate.

The government estimates that 10,500 more estates will face an IHT bill in the 2027/28 tax year due to the new rules. A further 38,500 estates are expected to pay more IHT than they would under current rules.

Estate planning is about more than reducing tax. It's about making sure your wealth is passed on in line with your wishes, while balancing your own needs during retirement. The pension changes may mean some people need to revisit those plans.

Example

Joanne is a single mother and plans to leave her family home to her children. She also has savings, investments and a defined contribution pension.

Joanne’s estate is valued at £1.325 million. Assuming she qualifies for the full £325,000 nil rate band and the full residence nil rate band, her total available allowance is £500,000.
Before April 2027, her pension would generally sit outside her estate for IHT purposes. Therefore, only £725,000 would be included in the IHT calculation. In this case, the tax liability on her estate would be £90,000.

From April 2027, Joanne’s unused pension fund is included when the value of her estate is calculated. This increases the value of the estate to £1.325 million for IHT calculations. Assuming the standard 40% IHT rate applies and there are no other exemptions or reliefs, the estimated IHT liability on Joanne’s estate rises to £330,000.

Including Joanne’s pension in her estate therefore increases the tax liability by £240,000.

Who these changes may affect

• People with sizeable unused pension funds
• Homeowners whose property already uses much of their available allowances
• People who have deliberately preserved their pension to pass it on
• Families whose existing retirement or estate plans rely on pensions remaining outside the estate
• Those with larger pension funds and valuable property are most likely to be affected because these are often a person’s largest assets. People who have deliberately preserved pension wealth to pass on to future generations may also wish to review their plans.

Claire Trott, head of advice at St. James’s Place, says: “Taking the time to understand the impact of these changes is crucial to making the right decisions.”

Those who may end up with a higher IHT bill after the rule changes could be tempted to reduce this liability by gifting assets, Claire notes.

“One thing is clear: you need to ensure that you have enough for your lifetime before you start giving it all away to avoid tax,” she adds.

What to do if your estate becomes liable for IHT

If you think your pension could push the value of your estate above the IHT allowances, or increase an existing liability, it’s worth taking some time to understand the potential impact as well as the options available.

Avoid making rushed decisions
The changes to IHT are due to take place in April 2027, so there is time to plan. Making decisions in haste can sometimes lead to unintended consequences.

Understand your position
Having a clear understanding of your estate is essential before making any decisions. Build a clear picture of what you own and what it is worth – this includes your home, pension(s), savings, investments and other possessions.

Review existing plans
Once you have a clear understanding of your position, check your plans still reflect what you want to achieve.

Seek advice if needed
Financial advice can be valuable, whether you’re looking to understand your position, explore your options or deal with more complex estate planning needs.

Pause before acting

The forthcoming changes to the IHT landscape are likely to affect people in different ways. Many may see little practical impact, while others may need to reconsider how they fund retirement and pass on wealth.

Understanding your position now can give you time to consider your options and make informed decisions with confidence. Get in touch today.

Source
¹UK government policy paper: Inheritance tax on unused pension funds and death benefits, July 2025 – accessed August 2026