What is the latest for pensions and IHT?
At the Autumn Budget in October 2024, the then-new chancellor Rachel Reeves announced the government’s intention to look at pensions and IHT and start including pensions inside the scope of Inheritance Tax (IHT) from April 2027.
As of the 2025/26 tax year, pensions are typically not included in your estate when calculating IHT. If you die aged 75 or over, your beneficiaries will usually pay Income Tax at their marginal rate when they come to access your pension funds.
But otherwise, this meant that leaving your pension untouched and living on other assets during retirement was a potentially effective strategy for tax-efficiently passing wealth to your loved ones. So, these changes could be significant if you had planned to do exactly that.
It is not yet confirmed that these changes will come into place. However, the government did outline more specifically how this will work in a consultation in July 2025, alongside a policy paper and draft legislation, suggesting that they intend to forge ahead with this plan. As a result, it’s important to be aware of what changes are coming into place, and how they could affect you. Read on to find out more.
Pensions and IHT – the government has now provided details of which pots will fall in and outside of the scope of the Inheritance Tax regime
One of the key pieces of information to come out of the latest releases is confirmation of the pension death benefits that will and won’t be in scope for IHT.
Pots that are potentially set to be subject to IHT include:
- Unused defined contribution (DC) pots, including workplace pensions, personal pensions, and self-invested personal pensions (SIPPs)
- Most lump-sum death benefits from registered pension schemes, including DB schemes
- Unused guaranteed payment period annuities
- Relevant non-UK pension schemes and assets, such as qualifying recognised overseas pension schemes (QROPSs)
- Lump-sum payments made into a bypass trust.
Meanwhile, pension benefits that won’t be pulled into the IHT regime include:
- Death in service benefits from registered pension schemes, including benefits that do currently form part of an estate, such as those from the NHS pension scheme
- Dependants’ pensions (most commonly paid from defined benefit (DB) schemes, but also possibly by DC occupational schemes)
- Funds paid as charity lump sum death benefits
- Certain types of annuities, such as joint life annuities or continuing payments for a dependant or beneficiary.
It’s important to fully understand which type of pension you have so you can gather whether your beneficiaries will face a charge.
Pensions and IHT – personal representatives will be responsible for settling a bill
The other key takeaway from the government’s consultation is the determination of whose role it is to calculate and pay a tax charge.
Initially, the government had proposed that pension scheme administrators be responsible for reporting and paying IHT on pots. However, pension scheme administrators responded negatively to this, noting a range of complications this would entail.
So, the consultation confirms that personal representatives of the estate will have this responsibility, just as they do for the remainder of the estate. In effect, this will see pension beneficiaries and/or executors be jointly and severally responsible for any IHT due on pension benefits they are entitled to.
The consultation does say that pension schemes will need to make the tax liability clear to non-exempt beneficiaries, to explain that IHT may be due on the benefits, how they can access the funds, and their options for paying IHT. But, broadly speaking, it will be the individuals’ responsibility.
This puts pressure on the individuals you select to manage your estate when you pass away. They will need to correctly calculate, report, and pay the associated IHT bill on your pension. As a result, you will need to be even more selective when choosing your executors, or consider pairing them with a professional to assist with the process.
Pensions and IHT – the double tax of Income Tax and Inheritance Tax is yet to be addressed
The other key issue that could affect your beneficiaries is the danger of them paying a double tax of Income Tax and IHT.
As it stands, because your beneficiaries would pay their marginal rate of Income Tax when withdrawing inherited pension funds if you die aged 75 or over, they might have to pay this and an IHT charge when inheriting your pension.
The consultation does make mention of this issue, stating: “Where both Income Tax and Inheritance Tax are paid on the same pension benefits, HMRC will develop mechanisms to account for any overpayments and ensure that these are refunded to beneficiaries.” However, no further details of how this will function have been released.
Pensions and IHT – careful planning can help you manage these changes
With all this in mind, you may be concerned about what these changes will mean for your pension, beneficiaries, and the IHT bill you might be leaving behind.
But, before you think about this, it’s worth noting that very few estates are set to be affected by these changes, according to estimates quoted in the government consultation on this issue.
These state that, of 213,000 estates with inheritable pension wealth in 2027 to 2028, just 10,500 estates will become liable for IHT when they previously would not have been. Furthermore, only 38,500 estates will pay more IHT than they would have previously.
So, although this is a significant change to how IHT will work for pension assets, the number of estates that will be affected is still relatively small.
That said, if you have sizeable pension wealth, you may want to act now to protect your savings from being eroded by IHT when passed to your loved ones. In that case, there are plenty of strategies you could consider to reduce your IHT liability and mitigate the tax charge your loved ones may be facing.
This might include:
- Gifting assets under tax-efficient allowances and exemptions to reduce the size of your taxable estate
- Using trusts to place assets in your beneficiaries’ ownership now, removing them from your estate
- Taking out life cover in trust to provide a lump sum that your beneficiaries can use to quickly settle any remaining IHT charge.
Before you implement any of these strategies, it’s important to consult a financial planner, such as our team at RPGCC. We can help you avoid any costly mistakes with IHT planning, and ensure you’re making the right choices in your circumstances.
Get in touch
If you would like to find out more about upcoming changes to pensions and IHT, we can help.
To arrange an initial meeting with no obligation, please contact us at hello@rpgcc.co.uk or call 0203 697 7147 to speak to us. Or you can visit our web chat in the bottom right corner, which we respond to personally during office hours and you can leave a message out of hours. The RPGCC team is always just a click or call away.
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.
