Things you need to know
- These changes aren’t finalised and won’t take effect until 6 April 2027.
- Most estates – all the property, money and assets owned by a particular person at the time of their death – will not pay extra IHT, as they’ll remain below current thresholds.
- If you’ve already accessed your pension savings, these changes won’t affect you.
- Pensions are designed to fund your retirement and remain a tax-efficient way to save.
For more information, visit our Pension tax page
What’s changing in IHT and how may it affect pensions?
In the 2024 Autumn Budget, Chancellor Rachel Reeves announced that from 6 April 2027, unused pension savings may be included in your estate for IHT purposes.
Currently, unused pensions, like those in The People’s Pension, are typically paid tax-free to beneficiaries at the discretion of Trustees. Under the proposed changes, unused pension savings could be taxed as part of your estate if it exceeds the IHT threshold.
The details of how this will work in practice haven’t been finalised at the time of writing.
What’s an unused pension?
An unused pension is one that hasn’t been used to claim an income, such as buying an annuity product. This is currently expected to include both savings in your pension pot and those that have been designated to a Flexi Access Drawdown Account (often referred to as ‘FAD’ or ‘Drawdown’).
What happens to unused pensions now?
Unused pension savings with The People’s Pension aren’t usually part of a member’s estate and don’t normally count toward IHT.
Instead, they’re paid out at the Trustee’s discretion, often to a family member, and are typically free from IHT.
However, taxes may apply if the member was over 75 at death or if the payment exceeds the £1,073,100 lump sum and death benefit allowance. These rules remain unchanged.
What’s Inheritance Tax (IHT)?
IHT is a tax on the estate of someone who has died. It’s charged at 40% on the value of an estate above the tax-free threshold:
- £325,000 for most estates.
- £500,000 if passing a home to children or grandchildren (when the estate is under £2 million).
- Anything left to a spouse or civil partner is IHT-free..
The government do not plan to change these thresholds before 2030.
How will this affect you?
From April 2027:
- Any unused pension savings with People’s Partnership will be included in IHT calculations if your estate exceeds the tax-free thresholds.
- If IHT applies, the required tax will be deducted by People’s Partnership before making payments to beneficiaries.
The vast majority of estates however currently don’t pay IHT, and this is expected to remain the case.
How do the proposed changes affect recent bereavements?
If you’re a beneficiary or handling the estate of a loved one that had a pension with People’s Partnership, this change shouldn’t impact you.
For what to do next, go to our beneficiary page.
Why are these changes happening??
The government aims to close a loophole allowing some individuals to use pensions for inheritance planning rather than retirement income. These changes align pensions with other types of assets for IHT purposes.
Some examples
Case study 1: Emily – additional IHT due
Emily, aged 73, died with a defined contribution (DC) pension worth £700,000 and other assets worth £800,000. She didn’t use her pension during retirement, as she relied on other savings.
Current position
Emily’s estate is valued at £800,000 for IHT, as her pension is excluded. After applying the £325,000 nil-rate band, her estate owes £190,000 in IHT (40% of £475,000).
From April 2027
Emily’s pension will be included in her estate, increasing its value to £1.5 million. IHT owed rises to £470,000 (40% of £1,175,000).
The pension fund will cover £219,333 of this IHT, with the remaining £250,667 payable by her estate.
Case study 2: Joe – no additional IHT due
Joe, aged 70, died with a DC pension of £50,000 and other assets worth £260,000.
Current position
Joe’s estate, valued at £260,000, doesn’t include his pension and falls below the £325,000 nil-rate band. No IHT is due.
From April 2027
Joe’s pension will be added to his estate, raising its value to £310,000. As this is still below the nil-rate band, no IHT will be due.
This information reflects our understanding of the proposed changes and does not constitute legal or financial advice.
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