How Inheritance Tax changes could affect your pension

placeholder image — Sam Goult of AC Wealth | supplied

With the Inheritance Tax net capturing more taxpayers than ever before, it’s no longer just the concern of the very wealthiest, writes Sam Goult of AC Wealth.

The term ‘inheritance tax’ indicates it is a concern for the very wealthiest, however changes at the Autumn Budget 2025, indicate that from April 2027 up to 10,500 households are expected to be liable for an inheritance tax bill, who were not affected before.

What is changing?

From 6 April 2027, a person’s ‘estate’ will now include any unused pension funds for inheritance tax purposes. This is a significant change. Under the current rules, many defined contribution pensions normally sit outside the estate and can often be passed on without incurring any inheritance tax.

If someone dies before 6 April 2027, the current inheritance tax rules will continue to apply, even if pension benefits are paid after that date. The change follows the Autumn Budget announcement and is intended to reduce the use of pensions for passing on wealth tax efficiently rather than funding retirement.

The standard rate of inheritance tax is 40% and that the nil rate band remains £325,000. Or £650,000 for married couples. In addition to this change expected to affect 10,500 estates, a further 38,500 estates may pay more inheritance tax than before.

Why does this matter?

For many people, inheritance tax will continue to not be an issue, with most people using up their pensions for their original purpose of funding retirement. With added complexities to IHT such as the timing of when a person dies, advice and preparation is key to ensure your assets are protected, and the value to your estate that you anticipate leaving to others is not liable for a hefty tax bill.

For those who have built up a valuable pension pot, own a home, have investments, or other assets that already bring their estate close to the inheritance tax thresholds, once unused pension savings are added to the estate, more families may find that inheritance tax is due.

The rules could also affect how estates are administered. Personal representatives are expected to identify relevant pension benefits, obtain valuations, and report any inheritance tax due within set timescales. Pension scheme administrators will have information-sharing duties to support this process, so keeping pension details up to date and easy to find will become increasingly important.

Some benefits are expected to remain outside the new rules, including death in service benefits and dependants’ scheme pensions. Existing inheritance tax exemptions, such as transfers to a surviving spouse or civil partner, should also continue to apply where the conditions are met.

What should you do now?

Make sure your own retirement income needs come first before considering withdrawals, gifts, insurance or other planning options.
Review your pension funds, beneficiary nominations and wider estate before April 2027.
Check whether the value of your home, savings, investments and pensions could bring your estate above inheritance tax thresholds.
Do not assume leaving your pension untouched will still be the best approach for inheritance tax planning.
Keep clear records of pension providers, account details, scheme contacts and professional advisers so your family can access information when needed.
Seek advice before making major changes, as the right approach will depend on your estate, family circumstances, tax position and income needs.

Be Prepared

The rules apply from 6 April 2027, so there is still time to understand what you have, how it fits into your overall financial plan and whether any changes may be appropriate, or to seek advice from an independent financial planner with regards to your financial estate and a lawyer with regards to setting up trusts, reviewing your Will and Power of Attorney to ensure your paperwork is aligned with your wishes.

Make use of free resources available such as Moneyhelper or Which Money that provide comprehensive guides on Inheritance Tax, confirming what is included in your estate and inheritance calculators. Consider the time it can take to identify and gather information from various pension providers.

While the rules are complex, with the right advice there are solutions available to help make measured and informed decisions ahead of April 2027, so there are no unanticipated tax bills for your or your family.

The content is for information only and should not be taken as advice. AC Wealth is an independent financial planning firm with offices across Scotland.

Sam Goult is a Director and Financial Planner at AC Wealth, based in Perth.

More details on explaining IHT can be found on the following resources: