Wondering what's going on with pensions and inheritance tax?

Thankfully, our friends and sponsors at Beech Tree Financial Advice have set their expertise to untangling this subject.

Here's their advice.

What's happening with pensions and inheritance tax?

Currently, many pension pots (especially those in defined contribution schemes) are not treated as part of your estate for the purposes of Inheritance Tax (IHT).

In other words, when someone dies, their unused pension fund often bypasses the IHT calculation.  

However, the government has announced that from 6 April 2027 most unused pension funds and death benefits will be included within the value of a deceased person's estate for IHT purposes.  

So, what does that mean in practice? If when you die, you still have a large pension pot that has not been drawn down (or if your beneficiaries are left with pension death benefits), that pot will be added to your estate.

If your total estate (including that pension) exceeds the nil-rate band (currently £500,000 for most, including the residence nil rate band) then IHT may become payable on that excess.  

It is also worth noting that certain benefits remain excluded (for example, so-called "death in service" lump sums from registered pension schemes will remain outside scope).  

In simple terms: a pension pot that was previously "safe" from IHT in many cases may now increase your overall estate value and thereby push you into IHT territory. For example: if you own your home plus a big pension, your combined estate could exceed thresholds and trigger IHT.

Why is the change being made?

The government's stated objective is to remove distortions and make the treatment of pension wealth more consistent with other forms of wealth. They note that pension assets were increasingly being used as vehicles for inter-generational wealth transfer rather than purely retirement income.  

In other words: pensions were being saved, left undrawn, and then passed on free of IHT — which the Treasury argues is unfairly advantageous compared to other assets.

What will change? 

• From 6 April 2027, most of the unused pension fund and certain death benefits will count towards your estate for IHT.  
• The standard IHT rate remains 40% (on the value above the nil-rate band).  
• The nil-rate band (for many people) remains unchanged in the short term, so the key change is what counts inside the estate.  
• Some pension-related benefits are still exempt (for example, certain dependants' scheme pensions, certain death in service benefits) — so the rules are not blanket for every pension type.  
• This change may especially affect people with large pension funds who haven't drawn them down, and who also have substantial other assets (property, investments, etc.).

What this means for your estate planning (and where Beech Tree Financial Advice can help):

1.) Reviewing pension draw-down strategy

If you have a sizeable pension, it may make sense to review how you plan to access it (income, draw-down, annuity) and when. It might be more tax-efficient to start drawing some of it now, or adjust how you are using it, so that less is "unused" at death and subject to the IHT inclusion.

At Beech Tree Financial Advice we can run through your pension options, model scenarios, and help you understand the tax implications of different approaches.

2.) Estate and inheritance planning

Because the pension is moving into the IHT calculation, it becomes part of your wider estate planning. We can work with you (and your legal advisers) to look at:

• how much your estate currently looks like, including your pension, property, investments
• whether IHT might become payable under the new rules
• whether there are steps you can take now (gifting, pension access, trusts, etc) to mitigate this.

We can coordinate with your solicitor or will-writing adviser to ensure your pension nomination forms, wills and trusts are aligned with the new tax position.

3.) Beneficiary nomination and pension death benefits

It's also important your pension death benefit nominations (or letters of wishes) are up to date. Even though the pension will count towards the estate, the way death benefits are paid (lump sum vs income, to spouse vs children) will have tax consequences. Beech Tree Financial Advice can review your existing nominations and help you consider whether they are still suitable in light of the new IHT rules.

4.) Timing and liquidity issues

With the changes coming into effect in 2027, there is time to plan — but it is not infinite. We would encourage you not to leave everything until the last moment. Some action now could give you more flexibility. At Beech Tree Financial Advice we can help you understand your options, set realistic timelines, and avoid rushed decisions.

5.) Regular reviews

Tax rules and pension rules may continue to evolve. We recommend regular review (e.g., annually or when a major change occurs in your circumstances) so that your pension access, estate plan and nominations stay aligned with both your goals and the tax environment. We at Beech Tree Financial Advice will support you in monitoring changes and adjusting your plan

What you should do now:

It is quite possible that for many people the change won't mean any IHT bill — for example, if the total of their assets (including pension) is well below the nil-rate band, or when everything passes to a spouse (which remains IHT-free). But for those with larger pension funds and significant assets, the change is a "wake-up" call.

At Beech Tree Financial Advice we say:

• Don't assume the old rules still apply — this is a fundamental change.
• Review your pension and estate plan now (rather than leaving until the last minute).
• Work out what your likely estate value will look like including the pension.
• Consider how your pension will be accessed, how death benefits are paid, and how that aligns with your wishes and tax position.
• Stay in touch with your adviser (we're happy to help) and make sure your plan remains appropriate as rules and your personal circumstances evolve.

If you'd like to schedule a free initial consultation, we at Beech Tree Financial Advice would be very happy to sit down and talk this through with you. Please contact us at beechtreefinancial.co.uk or visit our office in Heaton Chapel at 334 Wellington Road North, SK4 5DA.

Alternatively, fill in your contact details below and Beech Tree will be in touch!

Estate Planning and Inheritance tax Planning is not regulated by the Financial Conduct Authority. Tax treatment varies according to individual circumstances and is subject to change.

Approver Quilter Financial Services Limited November 2025.