Changes to pensions & inheritance tax in the Budget
A major change is coming to how pensions and inheritance tax (IHT) work together. The chancellor, Rachel Reeves announced in the Budget 2024, pensions would no longer be excluded from your estate and are, therefore, subject to IHT.
Until now, many families have used pensions as a clever way to pass wealth to the next generation tax-free. But from April 2027, these rules are changing significantly, potentially affecting how much of your pension savings your loved ones will inherit.
What you need to know
- The historic tax advantages of passing on pensions and how this is changing
- How the 2027 reforms will transform the role of pensions and IHT
- What these changes mean for your family’s financial future
- Why larger pension pots are now facing new tax risks
- Smart alternatives to protect your legacy and avoid IHT
Pensions and IHT – a match made in heaven?
Think of your pension as having previously been a special vault, protected from inheritance tax. Many people purposely preserved their pensions, spending other savings first, knowing their pension would pass tax-free to their loved ones.
It was a perfectly legal way to protect family wealth.
So, what’s changing?
New rules covering pensions and IHT
From April 2027, the game changes. Your pension will no longer sit in that protected vault.
instead, it will count towards your taxable estate. For instance, if you have a £500,000 pension and other assets already pushing you over the £325,000 inheritance tax threshold, your family could face a 40% tax bill on your pension too.
After the previous government abolished the lifetime allowance for pensions, people saw this as an opportunity to build up their pot, safe in the knowledge their investments would be protected against IHT. Alas, this has changed.
Before we move on, it’s important to clarify pensions are still an incredibly tax-efficient ways of investing and should still form part of your retirement planning efforts.
What this could mean for you and your family’s wealth
Imagine your pension as now being just like your house or savings account – part of your total estate for tax purposes.
For those with substantial pensions, this could mean significantly larger inheritance tax bills for their beneficiaries. It’s particularly impactful for families whose estates were previously under the tax threshold but might now exceed it once their pension is included.
However, there could be solutions.
Our recommendation?
Engage an inheritance tax adviser to see how you can still preserve your wealth and assets and there are many other legal inheritance tax avoidance strategies for you to consider. By consulting a specialist adviser, you will be in the hands of an experienced professional, adept at understanding your unique situation and providing you with tailored recommendations to manage your taxes.
Smart ways to protect your legacy and avoid IHT
Despite these changes, as mentioned above, you still have options to manage inheritance tax including:
- Make lifetime gifts
- Consider setting up trusts
- Support charities
- Use your annual gift allowances
- Take advantage of the residence nil-rate band
Changes to pensions and inheritance tax – quick summary
While these changes close a significant tax planning opportunity, they don’t shut the door on all tax-efficient estate planning. With careful consideration and the right strategy, you can still protect much of your wealth for the next generation. The key is to start planning now, well before the 2027 changes take effect.
Whilst the announcements in this year’s Autumn Budget may feel alarming, rest assured help is at hand.
Need advice?
Call us now on 020 3740 5856 to request a callback from an experienced IHT adviser.
Key factors to consider
- Add up your total current estate value including your pension
- Calculate how the 2027 changes affect your tax position
- Review your pension withdrawal strategy
- Explore gifting, trust and other options to avoid IHT
- Consider professional advice to navigate these changes
Commonly asked questions about the 2027 pension and IHT changes
Have a few burning questions after reading this article?
Please find below a few questions and answers covering this topic.
I’m retiring before 2027 – should I withdraw my entire pension before the rules change?
Not necessarily. While the new rules might make pensions less tax-efficient for inheritance, withdrawing your entire pension could create immediate tax implications. You might face significant income tax charges on large withdrawals, and you’d lose the tax-efficient growth environment pensions provide. Consider discussing a phased withdrawal strategy with a financial advisor that balances your retirement needs with inheritance planning.
If I put my pension into a trust before 2027, will it avoid the new IHT rules?
The government hasn’t yet released detailed guidance about existing trust arrangements under the new rules. While trusts remain a useful planning tool, they may not offer the same protection for pensions after 2027. It’s crucial to wait for further guidance before making major trust-based decisions, as anti-avoidance measures might be introduced alongside the new rules.
Will death-in-service benefits from my employer’s pension scheme also be caught by these new rules?
This is an important detail that many employers and employees are waiting for clarification on. Death-in-service benefits have traditionally been treated differently from personal pensions for tax purposes. The government is expected to provide specific guidance on how these benefits will be treated under the new regime before 2027.
I’m planning to leave my pension to charity – will these changes affect charitable giving?
While pensions will be included in your estate for IHT purposes, charitable donations will still reduce your overall IHT liability. In fact, leaving your pension to charity might become an even more tax-efficient strategy after 2027, as it could help reduce your estate’s total taxable value. Remember, leaving 10% of your estate to charity reduces the IHT rate on the remainder from 40% to 36%.
My pension is worth less than £325,000 – do I need to worry about these changes?
Even if your pension alone is below the IHT threshold, you need to consider its value combined with your other assets. For example, if you have a £300,000 pension and a £200,000 house, your total estate would exceed the threshold under the new rules. It’s worth reviewing your entire estate’s value, including your pension, to understand your potential IHT liability after 2027.
External resources
Can married couples inherit pension pots tax-free after the Budget changes?
Autumn Budget 2024: Pensions subject to Inheritance Tax from April 2027
