New Inheritance Tax Rules on Pensions: How to Protect Your Estate 

As part of the Labour government’s recent budget, pensions will now be included in the value of your estate for inheritance tax (IHT) purposes, effective from April 2027. This means that for many pensioners, what was once a tax-exempt asset could now push their estate above the IHT threshold, resulting in a substantial tax burden for their beneficiaries. 

What Does This Mean for You? 

Currently, the IHT threshold is £325,000, or £500,000 if you’re leaving your estate to direct descendants. Estates above these limits are taxed at 40%, and the inclusion of pensions in the taxable estate could mean more people face this tax. 

Case Study: How Pensions Will Impact Your Estate 

Proceeding the budget, the Government released a report explaining the effects of the addition of pensions into the taxable estate. Case study 1 considers the case of Emily as an example to demonstrate the effects of the addition of pensions into the taxable estate:  

• Current Estate Value: £800,000 

• Pension Value: £700,000 

• Total Estate Value: £1.5 million 

Under the new rules, Emily’s total estate would be £1.5 million, and after the IHT threshold of £325,000, she would face an inheritance tax liability of £470,000—leaving her beneficiaries with £705,000. 

Under the old rules, Emily’s pension wouldn’t have been included in her estate, and her IHT liability would have been just £190,000, leaving much more to her family. 

How Can You Protect Your Pension? 

With these changes coming into effect, it’s important to review your Will and take steps to protect your pension from inheritance tax: 

1. Adjust Your ‘Expression of Wishes’: By naming your spouse as a beneficiary for your pension in your expression of wishes clause, the pension will be exempt from IHT. This allows your surviving spouse to benefit from the pension without triggering tax, leaving more of their estate to pass on to your children. 

1. Review Your Will: If your estate (including your pension) is set to exceed the IHT threshold, now is the time to update your Will and consider strategies to reduce the IHT burden on your beneficiaries. 

Get Expert Advice 

If your estate is affected by these changes, now is the time to start planning. Contact us today for a free consultation to discuss how you can protect your pension and ensure your family inherits as much as possible, without unnecessary tax liabilities.