The Inheritance Tax (IHT) landscape is shifting as upcoming changes for pensions are set to take effect from April 2027.

We’ve written about these changes before:

• Inheritance Tax rules are changing for pensions: 5 ways you can mitigate their impact
• Why new pension rules have sparked a rise in charitable giving

The result of these changes is that pensions as an estate planning tool are becoming more restrictive, and certain IHT-efficiency benefits will be lost.

However, the rules aren’t black and white. Whether your potential IHT liability will actually increase from the next tax year is dependent on variables like:

• Pension type
• Qualifying relief and exemptions
• Who you leave your estate to.

To help you make sense of the noise, keep reading to learn six scenarios where you may or may not be liable to pay more IHT from April 2027.

You might be affected if…

Scenario 1: You pay into a defined contribution (DC) pension

The new rules are predominantly targeting defined contribution (DC) pensions.

A DC pension is one you regularly contribute towards, building invested wealth that can later be accessed at retirement. Because pensions are currently exempt from IHT, they have been valuable for passing on tax-efficient wealth.

However, when the new rules come into effect, unused pensions will count towards the total value of your estate, which could significantly increase your potential IHT liability.

In addition, any lump sums or death benefits provided from a defined benefit (DB) pension – which pays out guaranteed retirement income based on your earnings – will also be eligible for IHT.

Scenario 2: The value of your estate (including pension funds) exceeds the nil-rate bands

You can take advantage of certain thresholds to reduce the amount of IHT you pay:

• Nil-rate band (applies for everyone): £325,000
• Residence nil-rate band (applies to those passing on their main residence to a direct descendant): Up to £175,000

Any wealth that exceeds these bands (where they apply) is usually taxed at a rate of 40%.

With pensions moving into the scope of IHT, this may push more of your estate into the 40% taxable range and increase the amount of IHT due.

Scenario 3: You’re passing on your wealth to someone who isn’t your spouse or civil partner

When you leave your pension wealth to a spouse or civil partner, you can do so free of IHT. This means that all of your wealth and assets can pass to them without incurring an IHT bill.

When the time comes for them to pass on your shared wealth, they can take advantage of your unused nil-rate and residence nil-rate bands (for a possible total IHT-free allowance of £1 million).

However, this benefit only applies if you are married or in a civil partnership. If you are in a relationship but unmarried, the exemption won’t apply.

You might not pay if…

Scenario 4: You receive qualifying death-in-service benefits

HMRC released a technical note elaborating on certain exemptions from the new IHT pensions rule, including the lump sum provided by death-in-service benefits.

Death-in-service is an employer benefit. If you pass away while still employed, your loved ones receive a lump sum, which is usually tax-free and calculated as a multiple of your salary.

The death does not have to happen at work, and you usually will not pay for the cover.

If you’re unsure whether you receive death-in-service benefits, you can check with your employer.

Scenario 5: Your dependants receive regular income paid from your scheme pension

HMRC has also confirmed that dependants’ scheme pensions are explicitly excluded from the new IHT rules.

This is a regular income paid by a registered pension scheme to someone who is financially dependent on you after you die. This could be your:

• Spouse

• Civil partner

• Dependant unmarried partner

• Dependant child.

If received by an adult, it can run for the rest of their lives. If received by a child, it will continue until a set age (usually 18 or 23). But this depends on the specific policy.

While this income is IHT-free, it will be taxable based on the marginal rate of Income Tax the recipient is liable for.

Scenario 6: You take advantage of long-term financial planning strategies with The Pension Planner

The new IHT rules are concerning for many. In fact, IFA Magazine reports that 90% of financial advisers have witnessed their clients accelerating their pension drawdown ahead of the new rules.

When it comes to inheritance, you naturally want as much of it as possible to pass on to your loved ones. Yet, the new IHT and pension rules stand to impact many estates across the UK.

The above exemptions aren’t the only ways you can reduce your estate’s future IHT bill. Several other long-term strategies, like lifetime gifting, can help you mitigate a large bill.

When you work with a financial planner, we help you sort through the noise and discover the best options to reduce your tax liability, whether that’s leveraging exemptions you might not be aware of or utilising the most appropriate IHT-mitigation strategies.

Learn more about how The Pension Planner can help you by emailing info@thepensionplanner.co.uk or calling 0800 0787 182.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals 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.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.

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