Pensions have historically been a valuable tool for reducing inheritance tax, thanks to their unique treatment upon death compared to other assets. Before the budget, a different tax regime applied depending on your age at the date of death:
- If you die before age 75 – your pension can be inherited tax-free.
- If you die aged 75 or over – your loved ones will pay income tax on what they inherit at their personal tax rate (i.e., between 20%, 40% or 45%).
What are the changes?
In the October 2024 Budget, the government announced that from 6 April 2027, pensions won’t be protected from inheritance tax. Unused pension funds will be added to the estate’s value, meaning they’ll be taxed alongside other assets.
This is a significant shift for anyone who’s counted on pensions as a tool for passing down wealth.
Consider Emily, who has built up her pension fund during her working life. She passes away at 73 with no spouse and a daughter. Her pension fund is valued at £700 000. The remainder of her estate is valued at £800 000.
| Criteria | Pre-April 2027 | Post-April 2027 |
| General Estate | £800 000 | £800 000 |
| Unused Pension Pot | £700 000 | £700 000 |
| Total Estate Value | £1 500 000 | £1 500 000 |
| What is taxed? | First £325 000 exempt | First £325 000 exempt |
| 40% of £475 000 | 40% of £1 175 000 | |
| Inheritance Tax payable | £190 000 | £470 000 |
Under the new rules, Emily’s daughter would receive £280,000 less as part of the inheritance left to her. This is due to the addition of the pension to the overall estate and the increased inheritance tax bill as a result — a jump that highlights how significant this shift will be.
What This Means for You
As a long-term investment, pensions may no longer be the tool they once were for reducing your inheritance tax bill.
If you have a sizeable pension, it may be time to rethink your estate plan to minimize future tax costs and maximize what you leave behind. Get in touch with us to adapt your estate plan for the UK’s evolving tax landscape.
Book a FREE 15-minute call here.
Written by Khutso Makgoka, Global Tax Specialist