Last updated: 13 May 2025
92% of UK Financial Advisers say their clients are now most concerned about one thing: Inheritance Tax on pensions.
The new rules don’t come into force until 2027. But they’re already changing how people think about wealth.
In our latest poll:
- 55% of advisers are seeing a spike in demand from new clients
- 53% are seeing more demand for additional services from existing clients
- 67% say clients are looking for clarity as tax changes are creating confusion
- 60% say clients now value their advice ‘more than ever’
This article explores what’s changing, what it means for your pension, and how to protect what you’ve built.
What are the changes to Inheritance Tax on pensions?
In the Chancellor's 2024 Autumn Budget, two key changes to Inheritance Tax on pensions were announced:
- From 6 April 2027 any unused pension funds, or death benefits left when someone passes away, will be counted as part of their estate. This means they will be subject to Inheritance Tax.
- The government has frozen the Inheritance Tax threshold (also called the ‘nil-rate band’) at £325,000 until 2030. Under previous rules, the threshold was frozen till 2028.
With pensions set to face Inheritance Tax, it might be time to rethink how you protect your legacy. Let's look at what the new rules mean for you, and how you can adapt your strategy to preserve your wealth.
What is Inheritance Tax and how does it currently work?
Inheritance Tax is a 40% tax on what you own when you pass away, known as your ‘estate’. This can include money held in cash or investments, property, and other possessions.
Currently, up to £325,000 can be passed on to your loved ones before any Inheritance Tax is applied. If you leave your home to your children or grandchildren, the exemption increases to £500,000.
There’s no tax to pay if you leave your home to your spouse or civil partner. And if one of you has some of your nil-rate band left over when you pass away, the unused portion (calculated as a percentage) can transfer to the other partner’s allowance.
For example:
- Your nil-rate band is £325,000
- When you pass away, only £162,500 of your nil-rate band is used (50%)
- The unused 50% can be transferred to your spouse or civil partner
- This means your spouse or civil partner’s nil-rate band increases by 50%, from £325,000 to £487,500
Pension inheritance rules depend on when you pass away:
- Before age 75: beneficiaries inherit your pension tax-free
- After age 75: beneficiaries pay Income Tax on your pension funds based on their tax rate
How will the changes to Inheritance Tax on pensions impact me?
Pensions have long been an efficient vehicle for passing on wealth.
But under the new rules, pensions will be counted as part of your estate for Inheritance Tax purposes. This means that if the combined value of your estate, including your pension, exceeds the £325,000 threshold, the excess will be subject to tax.
While the changes aim to close what the government describes as a ‘loophole’ for wealthy estates, they also create a pressing need for people to reconsider how they plan for retirement and pass on wealth.
There's an urgent crisis emerging here where many people are raiding their pensions early and don't have a plan for what to do with their cash. Diversifying your cash among several different savings accounts is a good place to start, generating competitive returns while maintaining liquidity.
Four ways to protect your pension under the new rules
Now is a good time to rethink how you'll protect, manage, and access your cash during retirement. Here are four things to consider:
1. Review your pension withdrawal strategy
Withdrawing money from your pension could potentially reduce the value of your estate for Inheritance Tax purposes – assuming the pension funds are no longer part of your estate when you pass away.
Here's an example: if you withdraw £50,000 from your pension and spend or gift it during your lifetime, that amount would no longer be considered part of your estate and could reduce the amount of Inheritance Tax your loved ones might have to pay.
You can usually withdraw up to 25% of your pension as a tax-free lump sum once you reach the age of 55. Be sure to carefully balance early withdrawals with your long-term retirement income needs.
2. Manage withdrawn cash wisely
If you withdraw a lump sum from your pension, it's important to plan how you’ll manage and protect your money. Moving your cash into high-interest savings accounts can help it grow while keeping it accessible. Our cash savings platform lets you compare and open hundreds of accounts from 60+ banks – all in one place, with one login. You’ll also benefit from FSCS protection, which covers up to £85,000 per person, per bank.
Use our calculator to see how much interest you could be earning with Flagstone.
3. Explore pension wrapping strategies
Some financial tools can help you ‘wrap’ your pension – in other words, place it inside a tax-efficient structure that helps to reduce the amount of Inheritance Tax your loved ones might have to pay. For example, pensions left to a spouse or civil partner are taxed differently than those left to others. You might also want to think about options like giving gifts and setting up certain types of trusts.
4. Talk to a Financial Adviser
Speak with a Financial Adviser to rethink your estate strategy. They can help you decide whether to access pension funds early, manage assets effectively, and align your withdrawal strategy with your long-term financial goals. The right guidance now could mean more goes to those who matter most to you later.
These changes aren’t set to take effect right away, so you have some time to prepare. Take advantage of this period to adjust your approach and ensure your money is protected when the rules take effect.
Frequently asked questions about Inheritance Tax on pensions
When does Inheritance Tax on pensions start?
The new rules start on 6 April 2027. From then, any pension funds you haven’t used (or death benefits left behind) will be counted as part of your estate when you pass away. That means your family could be subject to Inheritance Tax if your estate goes over the £325,000 threshold.
Who pays Inheritance Tax?
Inheritance Tax is taken from the assets in the deceased person's estate. This is done by the person dealing with the estate (the ‘executor’) if there’s a will. If the total value of the estate is more than £325,000, the tax is taken off the estate first. Only what’s left is passed on to beneficiaries. Generally, beneficiaries don’t pay tax on what they inherit.
When do you have to pay Inheritance Tax?
Inheritance Tax needs to be paid within six months following the end of the month in which the person passed away.
What happens to my pension when I die?
It depends on your age and the rules in place when you pass away. Right now, if you die before you’re 75, your beneficiaries inherit your pension tax-free. If you’re 75 or older, they’ll pay Income Tax based on their own rate.
But from 6 April 2027, things will change. Any unused pension funds will be counted as part of your estate and could be subject to Inheritance Tax if your estate goes over the £325,000 threshold.
What happens to my pension if I place it in a trust?
If you place your pension in a trust, it’s not counted as part of your estate for Inheritance Tax purposes, potentially reducing the tax liability for your loved ones. But the pension fund must be managed according to the trust's terms, and the rules will vary depending on the type of trust used.
What happens if I leave my pension to a charity?
If you leave your pension to a charity, it won’t be subject to Inheritance Tax. This means the full amount goes to the charity, and it can help lower the amount of Inheritance Tax payable on your estate.
Who do I contact for more information?
If you have a question about Inheritance Tax, contact HMRC through their online digital assistant or over the phone.
