Major Changes Ahead: Proposed Inheritance Tax on Pensions from 2027

For years, defined contribution pensions have been celebrated not just for their retirement benefits, but also for their favourable Inheritance Tax (IHT) treatment. However, significant changes are on the horizon that could impact how your pension wealth is passed on.

The Current Landscape (Until 6 April 2027):

Today, defined contribution pensions—where you build a pot of money for retirement—are not normally considered part of your estate for IHT purposes. This means there is typically no inheritance tax to payon these funds upon your death. This has made pensions a popular and efficient way to pass wealth down through generations.

The Big Change: Pensions and IHT from 6 April 2027:

This advantageous position is set to change dramatically. It is proposed that from 6 April 2027, defined contribution pensions will be subject to inheritance tax. This marks a major shift in how these assets are treated upon death.

Understanding Inheritance Tax (IHT):

To put this change into context, it's important to understand the basics of IHT:

• Nil Rate Band (NRB): Everyone is entitled to a nil rate band of £325,000 of assets, which can be left to anyone free of inheritance tax. This is also known as the inheritance tax threshold. This threshold was set on 6th April 2009 and is frozen until 5th April 2030.

• Standard Rate: The standard rate of inheritance tax is 40%.

Estimated Impact of the Changes:

The government anticipates a notable impact on estates across the UK:

• Approximately 10,500 estates (representing 1.5% of total UK deaths) are estimated to pay inheritance tax for the first time due to these rule changes.

• An additional 38,500 estates are expected to pay more inheritance tax.

These figures highlight that while most estates might still not be affected due to the nil rate band, a substantial number will experience the direct impact of these new rules.

Why the Change? A Look at IHT Receipts:

The proposal to include pensions in IHT comes amid a broader trend of increasing IHT receipts. Forecasts indicate a significant rise in IHT revenue for the government:

• According to the OBR's Economic and Fiscal Outlook published in March 2025 inheritance tax receipts are projected to reach £8.4 billion in 2024-25, an 11.6% increase from the previous year, largely driven by higher asset prices and frozen tax-free thresholds.

• This trend is expected to continue, with receipts forecast to rise to £14.3 billion by 2029-30. Around £2.5 billion of this rise in 2029-30 is specifically attributed to policies announced in October 2024.

These changes underscore the growing importance of proactive estate planning, especially regarding pension assets.