Pensions are an excellent tool for retirement saving, and they’re also very useful for estate planning.
Currently, any savings left in your pension when you pass away are exempt from Inheritance Tax (IHT). This means you could leave a significant portion of your wealth to your loved ones without a large tax bill.
Unfortunately, in her 2024 Budget, Rachel Reeves suggested that the government might end the IHT exemption for pensions in the future.
The government has since confirmed that this change will take effect from April 2027.
Here is everything we know so far about the new legislation.
Unused pension savings currently fall outside your estate for Inheritance Tax purposes
Under the current rules, your beneficiaries will pay IHT on any portion of your estate that exceeds your “nil-rate bands”.
As of 2025/26, the nil-rate band is £325,000. You may also benefit from the “residence nil-rate band” of £175,000 when passing your main home to a direct descendant such as a child or grandchild.
You can also pass your entire estate to a spouse or civil partner without IHT and they will also inherit your unused nil-rate bands.
That means you can pass on up to £500,000 as an unmarried person or £1 million as a couple if you’re married or in a civil partnership.
Any wealth that exceeds this threshold will usually be subject to IHT at a rate of 40%.
Currently, pensions are excluded from your estate when calculating IHT. So, when the executor of the will is calculating the total value of the estate, they will not consider any savings left in your pension.
Instead, your pension provider pays the remaining funds to a beneficiary – normally a person you nominate by filling out an “expression of wish” form.
There is no IHT to pay on these savings, regardless of whether the rest of your estate exceeds the nil-rate bands.
This is why pensions have been one of the most tax-efficient ways to pass wealth to future generations.
The government confirmed planned changes to make pensions subject to Inheritance Tax from April 2027
When the chancellor first announced potential adjustments to pensions and IHT, she didn’t officially confirm that the changes would go ahead.
Since then, the government has consulted with the pensions sector and made some alterations to the plans.
This consultation ended on 22 January 2025 and on 25 July 2025, the government published the “Inheritance Tax on pensions” document. The government is currently drafting the legislation, and the changes are expected to come into effect from April 2027 onwards, as Reeves suggested in her previous Budget.
This could mean your family face a much higher IHT bill in the future.
In fact, according to the UK government, an estimated 10,500 estates will face an IHT bill where they previously wouldn’t have done as a result of the changes.
So, once the changes come into effect, you might need to reconsider your estate plan. Fortunately, you have until April 2027, and we can help you explore different options for transferring wealth without IHT.
The new rules will apply even if you pass away before you are able to access your pensions
Prior to the confirmation of the changes, there was some speculation about whether pensions would still be subject to IHT if the person passed away earlier in life.
Usually, you can only access your pensions once you reach the “normal minimum pension age” (NMPA). This is currently 55 but is increasing to 57 from 2028.
The chancellor confirmed that even if you pass away before 55, when you are unable to access your pensions, your savings will still be subject to IHT.
The executor of the will is responsible for calculating any Inheritance Tax due on your pension savings
One of the key problems that pension providers raised during the consultation was the issue of who would be responsible for calculating and paying any IHT due on the remaining pension funds.
Initially, the government suggested that pension providers would need to do this. However, pension experts warned this would create unrealistic deadlines and administrative pressures for schemes.
As a result, the government changed its position, and it will now be down to the executor to calculate whether any IHT is due on your pension savings when they are administering the estate.
The Inheritance Tax charge won’t apply to “death in service” benefits or “dependent’s scheme” pensions
While most pension savings will be subject to IHT after the rule changes, there are two notable exceptions:
- Death in service benefits
- Dependent’s scheme pensions
A death in service benefit describes a payment made to a nominated beneficiary if you pass away while on a company’s payroll. This is similar to a life insurance policy, but it is provided by an employer as part of your pension scheme.
Dependent’s scheme pensions, on the other hand, pay a regular income to a beneficiary such as a spouse, civil partner, or child after you pass away.
In either of these cases, the payments received by your chosen beneficiaries will not be subject to IHT.
Your beneficiaries may pay Income Tax on inherited pensions too
As well as the IHT on your remaining pension funds, it’s also important to consider the Income Tax beneficiaries might pay on inherited pensions when they access them.
This all depends on how old you are when you pass away.
If you pass away before 75, your beneficiaries won’t pay any Income Tax when drawing from your pension.
However, if you pass away after 75, they’ll pay Income Tax at their marginal rate. This could mean your beneficiaries lose a significant portion of their inheritance to tax.
For example, imagine your estate already exceeded the nil-rate bands, and there was £500,000 left in your pension.
Your beneficiaries would pay 40% IHT (£200,000) on this, leaving them with £300,000.
If they were a higher-rate taxpayer and you passed away after 75, they could then pay another 40% Income Tax (£120,000) when they accessed the remaining funds.
This would mean that, of the original £500,000 you left them, they would only receive £180,000. An additional-rate taxpayer would be left with £165,000.
It’s important to consider this when deciding on the most tax-efficient way to pass wealth to your loved ones.
Get in touch
We can help you navigate upcoming changes to IHT and leave as much of your estate to your beneficiaries as possible.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.