Pensions and Inheritance Tax: What the upcoming changes mean

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

What is an “unused pension”?

An unused pension is the part of a pension pot that has not been accessed or drawn by the member. 

In simple terms, this means any money still left in the pension at the point of death that has not yet been used to provide retirement income or lump sums.

This includes:

• Untouched pension pots - pension savings that have not yet been used.
• Money left in drawdown - pension savings that remain invested after someone has started taking income or lump sums.
• Certain pension death benefits - lump sums or other benefits that a scheme may pay because the member has died.
• Some guaranteed pension or annuity payments - continuing payments that may be due if someone dies during a guarantee period.

Some dependants' scheme pensions and certain annuity benefits are also excluded. These rules are technical, so it is worth checking with a pension provider or adviser.

What this could mean in practice

The upcoming changes don’t mean pensions stop being valuable. They remain an important way to save for retirement. However, they may need to be considered differently when thinking about how wealth is passed on.

The changes could affect families in a few important ways:

• Legacy planning - traditionally pensions have been used as an effective tool to pass on wealth to loved ones tax-efficiently, as no Inheritance Tax was due on unused benefits. Now that unused benefits are considered in an individual’s overall estate, they may be subject to IHT.
• Increased IHT exposure - with the current nil-rate band set at £325,000 per person (£650,000 for couples), many individuals could find themselves exceeding the threshold once pension assets are included in their estate’s value.
• Dual tax exposure - if someone dies after age 75, inherited pension benefits are usually taxable as income for the person receiving them. From April 2027, some inherited pensions may involve both Inheritance Tax and Income Tax considerations. HMRC says the part used to pay IHT should not also be counted as taxable income with more guidance due in the future.
• Bereavement process - personal representatives (the people dealing with the estate) will be responsible for calculating and paying any Inheritance Tax due on pensions. From April 2027, they will need to gather information from pension providers, include relevant pension values in the IHT calculation, and report and pay any IHT due.

Exemptions remain important

Some key exemptions will continue to apply to IHT on pensions.

Under standard rules, IHT is not due on any unused pension funds paid to a spouse or civil partner. This also applies to any pension death benefits.

Alongside this, unused pension benefits may be exempt from Inheritance Tax when transferred to a charity, as well as pension death benefits directed to a qualifying charity.

HMRC also says death-in-service benefits from registered pension schemes will be excluded for IHT purposes.

Why your will and Expression of Wish matter

The upcoming changes make it even more important to keep your paperwork up to date.

A will is a legally binding document that sets out who should inherit the assets that form part of your estate. If you don't have a will, the law states how your estate is passed on.

Pensions are often handled differently. Your will may not decide who receives your pension benefits. If you have thoughts about how you want your pension to be shared when you die, you should update your pension's 'Expression of Wish' (EOW) form. This lets scheme administrators know who you'd like them to pay pension benefits to.

An Expression of Wish is usually not legally binding, but it’s still very important. It helps the provider identify your preferred beneficiaries and can make the process easier for your family.

• Read: Fidelity’s Expression of Wish service

What can you do now?

The right approach will depend on your circumstances, but with upcoming changes getting closer, these steps may help:

1. Review your will
   Make sure it reflects your current wishes. A solicitor can help, especially if your family situation or estate is more complex.
2. Update your Expression of Wish
   Check each pension you hold. Older workplace pensions are easy to forget. It’s also worth checking your Expression of Wish after major life events such as marriage, divorce, the birth of children or grandchildren, or the death of a loved one.
   If you have a Self-Invested Personal Pension with us, you can learn more about how to complete your Expression of Wish here.
3. Keep a record of your pensions
   Make it easier for your personal representative or family to find your pension details after you die.
4. Think about who will inherit your pension
   The tax treatment for your pension may be different depending on whether benefits pass to a spouse, civil partner, charity, children, grandchildren or other beneficiaries.
5. Take advice before making big changes
   Changes to your pension like drawing more, gifting money, buying an annuity or changing your estate plan can all have tax consequences. In many cases it’s worth speaking to a financial adviser or tax specialist before acting to understand your options.

What’s next?

The main pension Inheritance Tax changes are now in law. They apply to deaths on or after 6 April 2027.

The Government has also set out a clear timetable for the next year spanning to spring 2027, promising to continue to publish further clarifications as needed and update tax manuals for April 2027 with detailed guidance on Inheritance Tax and pensions.

The key point is that pensions are still valuable for retirement planning. But from April 2027, they may no longer sit outside IHT in the way many people have become used to. Reviewing your plans now could help your family understand what to expect and avoid unnecessary confusion later.

• Read: IHT: your questions answered on trusts, spouses and tax traps
• Read: Inheritance Tax taper relief explained
• Read: How to keep IHT records and avoid an unnecessary bill