Changes to Inheritance Tax (IHT) on pension pots are coming in April 2027, and while this might seem far away, now is the time to start planning.

Delaying could leave your loved ones with a significant tax bill or reduce the financial legacy you intend to pass on.

Here’s what you need to know and why you should act sooner rather than later.

What is changing?

If you die with unused money in your pension pot, it is typically not subject to IHT. Instead, your remaining pension savings are often passed to beneficiaries tax-free, as long as they’re below specific limits and depending on the deceased’s age.

However, from 6 April 2027, unused pension savings will be included in the calculation of an individual’s estate for IHT purposes.

This means that if your total estate – including pension savings – exceeds the IHT threshold, your beneficiaries could face a 40 per cent tax on the excess amount.

We are still waiting for the details of this change to be finalised, so keep an eye out for further developments to see how it could impact your loved ones.

What could this mean for you?

For many people, pensions are a major part of their wealth, and many rely heavily on them to fund their retirement.

Current IHT thresholds:

• Each individual has a £325,000 tax-free allowance (the nil-rate band).

• An additional £175,000 residence nil-rate band (RNRB) applies when passing a main home to direct descendants (e.g., children, grandchildren). This means an individual can pass on up to £500,000 tax-free if the RNRB applies.

• Married couples and civil partners can combine their allowances, allowing them to pass on up to £1 million tax-free.

These thresholds are frozen until 2030, making proactive planning essential as asset values increase.

If your total assets – including property, savings, and, from April 2027, your pension – exceed these limits, your family may face a substantial tax burden.

Example scenario – How the new IHT rules could affect someone like James

James, 74, had a defined contribution (DC) pension worth £600,000 when he died and additional assets valued at £700,000, including his family home, which he intended to pass to his children (he never got married).

Under the current system (2024/25), his estate’s IHT liability is calculated as follows:

• Total taxable estate: £700,000 (excluding pension)

• Taxable amount after £325,000 nil-rate band + £175,000 RNRB: £200,000

• IHT due: £80,000 (40 per cent of £200,000)

Under the new 2027 rules, James’s unspent pension will be included in his taxable estate:

• Total taxable estate: £1.3 million (including pension)

• Taxable amount after £325,000 nil-rate band + £175,000 RNRB: £800,000

• IHT due: £320,000 (40 per cent of £800,000)

That’s an additional £240,000 in IHT, reducing the amount his family receives.

Why you need to start planning now

While these changes won’t take effect until 2027, waiting until the last minute could leave you with fewer planning options.

Strategies to consider:

• More tax-efficient withdrawal strategies – Using your pension during retirement rather than keeping it as a lump sum for inheritance purposes may reduce potential IHT liabilities.

• Estate planning adjustments – Reviewing your estate and considering tax-efficient investments or gifting strategies could help minimise the impact.

• Exploring alternative solutions – Other financial planning tools, such as trusts, might become more relevant under the new rules.

The majority of the British population will remain unaffected by these changes from 2027 onwards. However, an estimated 1.5 per cent of UK estates will become liable for IHT for the first time, while 4.5 per cent will see an increase in the amount they owe.

Those with significant pension savings should take proactive steps to avoid unnecessary tax burdens.

Will these changes affect your estate? Speak to our experts at TWP today to ensure your assets are structured tax-efficiently – so your pension benefits you and your loved ones, not the taxman.