Pension/inheritance tax changes - your questions answered

From April 2027, most unused pension savings will be included within your estate for inheritance tax purposes. While these changes won't affect everyone in the same way, they could have implications for how much wealth your loved ones eventually inherit.

The good news is that everyone's circumstances are different, and there may be steps available to help reduce the impact. Understanding what is changing now can help you make informed decisions about your retirement and estate planning.

Below, we've answered some of the most common questions we hear about the upcoming reforms. 

As announced in the 2024 Autumn Budget, most unused pension funds and certain pension death benefits will be included in the value of an estate when inheritance tax is calculated. 

Until now, pensions have generally been outside the scope of inheritance tax. From April 2027, many pension savings that would previously have sat outside an estate could be included when inheritance tax is assessed.

For some families, these changes may have little or no impact. For others, they could result in a higher inheritance tax bill and reduce the amount of wealth passed on to future generations.

It should be noted that the normal inheritance tax exemption for assets passing to a spouse or civil partner will continue to apply. This means that a pension passing to a surviving spouse or civil partner will normally be exempt from inheritance tax at that point, although it may form part of the survivor’s estate when they later die. 

The new rules will take effect from 6 April, 2027. 

If you die on or after this date, unused pension savings could form part of your estate for inheritance tax purposes and may be subject to inheritance tax depending on your circumstances and available allowances. 

No.

While most unused pension funds and death benefits will be affected, some benefits remain outside the new rules. 

Examples of pensions and benefits that are expected to remain excluded include:

• Death in service benefits payable from a registered pension scheme
• Dependant’s scheme pensions from certain defined benefit (final salary) schemes
• Dependant's pensions from collective money purchase arrangements.

At present, pension savings typically sit outside your estate for inheritance tax purposes.

This means pension assets are not generally included when inheritance tax is calculated, even if other assets such as property, investments and savings are.

As a result, many people have chosen to preserve pension wealth and use other assets to fund retirement, leaving pension savings to future generations.

The government announced these changes as part of a wider review of inheritance tax and wealth transfer rules.

Its objective is to bring most unused pension savings into the inheritance tax regime, so they are treated more consistently with other assets when someone dies.

While the changes alter how pensions may be treated for estate planning purposes, pensions remain an important and tax-efficient way to save for retirement.

The key consideration for individuals and families is understanding how the new rules could affect their own circumstances and whether any planning opportunities should be explored before April 2027.

Possibly. 

Whether these changes affect you will depend on the value of your estate, the size of your pension savings and how your assets are structured.

You may want to pay particular attention if:

• A significant proportion of your wealth is held in pensions.
• Your estate may exceed available inheritance tax thresholds and allowances.
• You intend to pass pension assets to children or grandchildren.
• Part of your retirement and estate planning strategy relies on preserving pension wealth for future generations.

If any of these apply, reviewing your plans before April 2027 could be worthwhile.

Potentially.

If you're likely to be affected, there may be actions worth considering before the new rules come into force.

For example, some people may:

• Review how they draw retirement income.
• Consider gifting strategies.
• Examine wider estate planning arrangements.
• Review existing trust structures.
• Reassess how different assets are being used to meet retirement objectives.

However, it's important not to make changes purely to reduce tax.

Any decisions should support the lifestyle you want in retirement while helping you achieve your longer-term family and wealth transfer goals.

A financial adviser can help you understand the trade-offs involved and model different scenarios before you make any decisions.

1. How much of my wealth is currently held in pensions?
2. Will my existing plans still achieve what I want after April 2027?
3. Have I recently reviewed my estate planning arrangements?

If you're unsure of the answers, it may be time for a review.

Not necessarily.

Pensions remain one of the most tax-efficient ways to save for retirement.

They continue to offer several important tax advantages, including:

• Tax relief on eligible contributions.
• Tax-efficient investment growth.
• Flexibility around how retirement income can be taken.

While their role in estate planning may change from April 2027, pensions are still likely to play an important part in many people's long-term financial plans.

Potentially.

If a larger proportion of your wealth becomes subject to inheritance tax, more of your estate could be paid in tax rather than passed to your beneficiaries.

The extent of any impact will depend on:

• The size of your estate.
• The value of your pension savings.
• Who inherits your assets.
• Available allowances and exemptions.
• Any planning steps taken before the new rules apply.

For this reason, understanding your position early can be valuable.

Also, depending on the pension holder’s age when they die, and how benefits are taken, a beneficiary may also have to pay income tax when they receive money from an inherited pension. These income-tax rules are separate from the inheritance tax changes, so professional advice may be helpful to fully understand your position.

This depends entirely on your circumstances.

Here's a simplified example:

Suppose part of your wealth is held in a pension worth £100,000 that currently sits outside your estate for inheritance tax purposes.

If that pension becomes part of your estate under the new rules, the value of assets being assessed for inheritance tax could increase by £100,000.

Depending on available allowances and exemptions, this could increase the overall inheritance tax bill and reduce the amount passed on to beneficiaries.

It's important to remember that inheritance tax calculations can be complex, and the actual outcome will depend on your personal circumstances.

This article is for information purposes only. It is not intended as investment advice.

Fees, charges and eligibility criteria apply.

This article refers to third party sources which we believe to be true and accurate.

The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn't guaranteed and can do down as well as up. The benefits of your plan could fall below the amount(s) paid in.

Lloyds Wealth does not provide personal tax advisory and tax compliance, estate planning and administration, trust creation and management or will writing, however we can introduce you to a relevant specialist.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

Lloyds Wealth might receive a referral fee from some of the partners we introduce to you.

Any views expressed are our in-house views as at the time of publishing.
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