It can sometimes feel challenging to stay abreast of the shifting rules that affect your finances, especially when life is particularly busy.

Yet, keeping up with these changes is vital, as several may significantly affect the way you manage and pass on your wealth.

One such change is the treatment of pensions for Inheritance Tax (IHT). From 6 April 2027, most pensions will no longer sit outside the scope of IHT.

This could considerably change how you plan your estate and may potentially affect thousands across the UK.

In fact, the government website claims that:

  • Around 38,500 estates will face higher IHT bills once the reform comes into effect
  • 10,500 more households will be pulled into the scope of IHT.

With the 2025 Autumn Budget occurring on 26 November, there is also the possibility of further changes, such as extended freezes on thresholds.

So, continue reading to discover how the changes will affect your estate plan, and how you can prepare your finances.

The current pension rules allow you to pass on your fund without incurring Inheritance Tax

For many, pensions currently offer a highly IHT-efficient way to manage their finances. Unlike other forms of wealth, such as property or ISAs, pensions have usually sat outside of your estate for IHT purposes.

This has meant that you could draw an income from other sources to fund your retirement, and preserve your pension to pass on to your next of kin IHT-free.

This applies to most types of defined contribution (DC) pensions. Similarly, in most cases, defined benefit (DB) pensions and associated death benefits fall outside your estate, although this is not the case across the board – for example, non-discretionary death benefits are usually included.

However, you should also remember that while pensions have been free from IHT, they can still be subject to other forms of tax depending on when you pass away.

If you die before the age of 75, your beneficiaries typically receive the pension benefits tax-free, provided the total falls within the Lump Sum and Death Benefit Allowance (LSDBA). This stands at £1,073,100 as of 2025/26, although you may have a higher LSDBA if you previously applied for Lifetime Allowance protection.

But, if your passing occurs after 75, your beneficiaries may pay Income Tax at their marginal rate on withdrawals.

From April 2027, your pension will fall within the value of your estate

This will all change considerably from 6 April 2027. Following the 2024 Autumn Budget, the Labour Party’s first in 14 years, the new chancellor, Rachel Reeves, announced £40 billion in tax rises as she hoped to fill the “black hole” in public finances and rebuild services in the UK, the Guardian reveals.

The most notable reform was that pensions will no longer be automatically excluded from your estate for IHT purposes.

From that date, any unused pension savings or death benefits payable after you pass away could form part of your estate.

This means that any wealth held in your pensions that exceeds the nil-rate bands (more on this later) could face a 40% tax charge. As a result, the amount of your pension wealth that your loved ones are set to receive could significantly reduce.

The graph below shows the government’s forecast for how many more billions in IHT revenue pensions are expected to generate in the 20 years after 2027.

Source: Financial Times

While both DC and DB pensions are set to be included in your estate after the reforms, there are some exceptions. It’s important to speak to a pensions professional if you are unsure whether your pension will fall in or out of the scope of IHT.

It’s also worth noting that the spousal exemption for IHT, under which spouses and civil partners don’t pay tax when inheriting from their deceased partner, is remaining in place. This means that if you pass your pension to your spouse or civil partner, they wouldn’t have to pay IHT.

As you can see, the rules surrounding IHT on the different forms of pension are complex. Furthermore, the government has confirmed that personal representatives will be responsible for calculating any IHT due, rather than pension scheme providers. This makes it all the more important to fully understand how the rules work, so your executors can accurately assess whether there’s a tax bill to pay.

So, it might be prudent to speak to your financial planner if you’re still unsure whether your fund will be subject to tax when the new rules come into place.

4 ways to prepare for the upcoming pension changes

Thankfully, there are steps you can take to prepare yourself and your finances for the changes ahead. Read on to find out how.

1. Make full use of your nil-rate bands

The IHT “nil-rate bands” determine how much of your estate you can pass to your loved ones without them facing tax.

For the 2025/26 tax year, the standard nil-rate band stands at £325,000. Additionally, you can benefit from the “residence nil-rate band” of up to £175,000 provided you pass your main home on to a direct lineal descendant.

This could allow you to pass on up to £500,000 tax-free.

Moreover, if you’re married or in a civil partnership, the unused portion of your nil-rate bands could transfer to your partner, meaning you could potentially leave up to £1 million to your loved ones free from IHT.

As such, it’s beneficial to ensure that your estate is structured to make full use of these allowances to mitigate as much IHT as possible.

You could even tactically leave assets to your spouse or civil partner to make use of the spousal exemption, potentially further reducing the payable IHT on your passing.

2. Use more of your pension while you’re alive

It’s also worth considering using more of your pension while you’re still alive.

Previously, you may have sought to preserve your fund as much as possible and live on other taxable assets in order to mitigate an IHT bill in future. However, this may change once pensions form part of your estate.

As such, it might be a good idea to use up more of your pension than you might have initially intended.

3. Purchase an annuity

An annuity is essentially a form of insurance product you can purchase using part or all of your pension fund.

In return, you receive a guaranteed income, usually paid monthly or annually, for a specific period.

There are several different types of annuity available, each with features that affect how much income you’ll receive.

If you’re looking for security in retirement and would prefer not to worry about stock market performance, an annuity could offer some much-needed peace of mind.

Crucially, certain types of annuities will not be included in the scope of IHT. For example, this includes joint life annuities, which pay an income to you and then to a surviving spouse, civil partner, or surviving dependant. So, you could purchase one of these using your pension savings.

Just note that some annuities might be included in the scope of IHT. Furthermore, purchasing an annuity might not suit you, so it’s worth speaking to your financial planner before committing to one.

4. Make use of a trust, and consider placing life cover in one

Trusts are another helpful estate planning option that could protect your wealth from IHT when you pass away.

This involves “locking away” a portion of your wealth for a beneficiary until a time of your choosing.

Ringfencing a portion of your wealth in a trust can be a tax-efficient way to plan for the future. This is because IHT on the assets held in some forms of trust can be calculated in different ways, potentially saving your loved ones a tax charge.

If an IHT bill seems inevitable, it might be wise to use the payment from life cover to settle an IHT bill.

Provided it’s written into trust, your beneficiaries can inherit a life insurance payout outside of your estate.

While this doesn’t necessarily reduce a tax bill, it can provide a method for your loved ones to settle the charge on your estate. Better yet, they can typically access the payout quickly.

Just remember that trusts can be highly complex, so it’s sensible to seek professional guidance first.

Get in touch

We could help you assess your wealth and determine the most tax-efficient ways to pass it on to your loved ones.

Email info@perennialwealth.co.uk or call 0117 959 6499 to find out more.

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.

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.

The Financial Conduct Authority does not regulate tax planning, trusts, or estate planning.