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Navigating the changes surrounding inheritance tax and pensions, which are going to be imposed in 2027, may seem like a daunting task. So it is important to get ahead and understand what is happening and how this will affect you, so you can plan for your future.
As of now (September 2025), inheritance tax applies to your ‘estate’, meaning your assets like investments, property and possessions, not including your pension pot, if your assets are valued at over £325,000 (nil rate band). This also means that accumulating wealth in most pension pots as a way to pass on inheritance has been an effective tax planning tool. The way it had previously worked was if the pension holder died before the age of 75 than the pension pot would be tax free, if death occurred after the age of 75 then the pot would be liable to only income tax.
April 2027 will see a change in the way you can pass down your pension alongside the rest of your estate. This is because where previously your defined contribution pension was not included as part of your estate, as of April 2027, your defined contribution as well as defined benefit schemes, will be included as a part of your estate therefore liable for inheritance tax which will be at a 40% tax rate. Additionally, beneficiaries of pension members who pass away after the age of 75 will have the inherited pension subjected to income tax of the beneficiary’s marginal rate. This means that beneficiaries may face tax rates as high as 67% overall reduction in the worst-case scenario.
But what does this mean for you, and how you plan for life after death? If you are leaving your pension to your children or other family members post-April 2027, it could mean a 40% inheritance tax (IHT) on the value of the fund. However, leaving your pension to your spouse or civil partner then spousal exemption applies meaning it would not be subjected to IHT. With pension assets being used to keep estates below inheritance tax nil-rate bands (£325,000 individually, and £650,000 combined for spouses), having pensions added to the pot makes it more difficult to preserve wealth.
Some things which you may want to consider in estate planning with these new changes could be utilising the tax-free gift allowances, whereby you can give assets or cash worth up to £3,000 in a tax year. Gifting will allow you to reduce your taxable estate, meaning less of your wealth will be depleted by tax, which then allows for it to be passed off to your chosen heirs. Furthermore, paying into pensions or ISA’s for your children or grandchildren to help them with their own retirement or general future asset acquirement could be a useful way in preserving the wealth of your heirs. Furthermore, you can provide gifts from your surplus income. By making regular payments from your surplus income, which doesn’t diminish your standard of living, it would mean that these are exempt from IHT. you can use the money as a way to support your children or grandchildren by paying the rent or mortgage on their property, as long as the payments meet the following three conditions; regular payments (cannot be a one-off transaction), must be from your regular income and not your savings (such as your pension or salary etc), and does not diminish your own standard of living (for example if you then have to start borrowing money, or cut back on certain essentials).
Although 2027 may seem like a while away, it is important to get ahead and start planning for your future and the future of your family. With pensions being included in estates and therefore liable to inheritance tax, what was once a highly efficient way in passing down wealth, could now be a tax burden for your heirs. Getting on top of your estate planning and understanding how to prepare will help you preserve your wealth for future generations.
