Understanding the Upcoming Changes to Pension Inheritance Tax in the UK

Starting April 2027, significant changes will affect how unspent pensions are treated in terms of inheritance tax. The Office for Budget Responsibility estimates that approximately 153,000 estates will be impacted by these new regulations. This article dives into the implications, what you need to know about the changes, and how they may influence your financial planning.

New Inheritance Structure for Pensions

Under the current framework, if an individual passes away at 75 years or older, their pension is taxed at their beneficiaries’ income tax rate. However, the proposed modifications mean that unspent pensions will now be treated as part of the estate and taxed at the inheritance tax rate of 40% for amounts exceeding the existing threshold of £325,000.

The Frozen Inheritance Tax Threshold

Since 2009, the inheritance tax threshold has remained frozen, despite rising inflation and increasing property values. This stagnation, combined with the inclusion of unspent pensions as part of the estate, suggests that a growing number of individuals may face substantial inheritance tax bills.

Every asset owned by a deceased individual, including business holdings, cash, rental properties, and now unspent pensions, is considered part of their estate. Any value beyond the £325,000 threshold could be taxed under the new rules.

Lifetime Gifting Challenges

Moreover, the UK government is contemplating a cap on lifetime gifting, which would impose taxes on gifts given by parents to their children many years before their passing. This adds another layer of complexity for individuals looking to manage their wealth strategically.

Retirees Taking Action: Spending More Pension Funds

In light of these changes, many retirees are adjusting their financial strategies. A recent survey conducted by RBC Brewin Dolphin indicates that 56% of retirees plan to spend a larger portion of their pensions on personal enjoyment rather than passing it down to their heirs.

Plans for Meaningful Experiences

Among those surveyed, 75% expressed a desire to travel more, and 40% indicated plans to invest in family experiences. While 39% still wish to gift their pensions to family members, understanding the tax implications based on the timing of death is crucial.

Tax Rates on Gifts Relative to Time of Death

Government Motives: Stopping Wealth Transfer via Pensions

Despite the controversial nature of the upcoming changes, the government remains steadfast in its intentions. An HM Treasury spokesperson stated, “We aim to encourage pension savings for their intended purpose—funding retirement—rather than being exploited as a mechanism for wealth transfer. Notably, over 90% of estates will still be exempt from inheritance tax following these changes.”

Rising HMRC Inheritance Tax Receipts

Recent data shows HMRC received £0.8 billion in inheritance tax payments in April 2025, an increase from nearly £100 million less in April 2024. This trend underscores how the frozen threshold is gradually pulling more estates into the inheritance tax bracket.

Analysts predict that the total inheritance tax collected in the 2025-26 financial year will exceed the £8.2 billion reported for 2024-25. By 2030, it is anticipated that nearly 10% of all estates will pay inheritance tax.

Conclusion: Preparing for the Future

As the landscape of pension inheritance tax shifts, it is essential for individuals to understand the implications surrounding these changes. Whether you are a retiree planning your spending or an estate owner contemplating your gifting strategy, now is the time to review your financial planning efforts to navigate the evolving tax landscape effectively.

For further insights or tailored advice regarding inheritance and pensions, consider consulting a financial expert.

This article is intended for informational purposes only and does not serve as specific legal, tax, or financial advice. Please consult a qualified professional regarding your individual circumstances.