Announcements in the 2024 and 2025 Autumn Budgets signalled major upcoming changes to how pensions are treated for Inheritance Tax (IHT) purposes. These reforms are set to take effect from 6th April 2027 and represent one of the most significant shifts in pension taxation in recent years, with wide-ranging implications for retirement planning and estate management.
Our tax team explain the key changes, highlight what they mean for pensioners and beneficiaries, and explore the steps individuals may need to consider taking now.
IHT thresholds frozen until 2030
In the 2025 Autumn Budget, the Chancellor confirmed that the current inheritance tax thresholds will remain unchanged until 2030.
This freeze is expected to bring more estates into the IHT scope, with estimates suggesting:
- 10,500 estates will pay IHT for the first time
- 38,500 estates will pay more IHT than they currently do
With rising asset values, particularly property and pensions, more families are likely to exceed the £325,000 nil-rate band and the £175,000 residence nil-rate band.
Pensions enter the IHT net from April 2027
From 6th April 2027, most defined contribution pensions will no longer be exempt from IHT. Currently, most pensions sit outside the IHT estate primarily because they are structured under discretionary trust. From 2027, this will change to the following:
- Unused pension funds and pension death benefits will form part of the estate for IHT purposes.
- An exemption will only apply when benefits pass to a surviving spouse/civil partner or a registered charity.
- Scheme discretion will no longer determine whether pension benefits are included in the estate.
This marks a major shift, especially for those using pensions as an estate-planning tool rather than purely for retirement income.
Important exceptions to the IHT changes
While most pensions will fall within the scope, death-in-service benefits are expected to remain outside IHT, though this depends on individual circumstances. Nominees’ annuities will also be treated differently as they are considered ongoing income rather than the transfer of wealth.
New administrative requirements for pension providers
The changes also introduce new responsibilities for both pension providers and personal representatives.
Pension scheme administrators:
- A requirement to supply details of the value of unused pension funds or death benefits within four weeks of being notified of the member’s death.
- The development of new IHT solutions to support the payment processes for beneficiaries and executors.
Personal representatives (executors):
- They will become responsible for reporting and paying IHT due on pensions, adding both complexity and administrative burden.
- They may issue a withholding notice instructing the pension scheme to retain up to 50% of the pension value for up to 15 months after the month of death.
This withholding mechanism is designed to ensure enough liquidity to settle tax liabilities.
How you can plan ahead
Previously, it was common for directors and shareholders to make substantial pension contributions as part of long-term tax and succession planning. With the upcoming changes in April 2027, it will become even more important to review historic contribution levels and understand how much value may ultimately form part of a taxable estate.
Furthermore, if a business owner’s children are employed by the company, there can be legitimate opportunities to make employer pension contributions on their behalf. This remains a valuable planning tool, but from 2027 it may take on greater significance as families look for ways to redistribute wealth with tax efficiency in mind during their lifetime rather than relying on exempt pension transfers after death. Business owners should ensure that contributions are proportionate to the role and remuneration of each family member to avoid scrutiny from HMRC.
However, excessive pension contributions could be challenged by HMRC under the “wholly and exclusively rule” and may cause issues on a future sale. This risk may increase as pension contributions become a more visible estate-planning strategy in the lead up to the rule change in 2027.
Get in touch with our team
If you are worried about how your pension will be impacted by the upcoming changes to inheritance tax, get in touch with a member of our specialist tax team for guidance about your next steps. For a wider overview of all pension and personal tax changes announced in the 2025 Autumn Budget, including ISA reforms and income tax updates, read our full summary.
