Planning for the future is important, and for many, pensions have been a key part of ensuring financial security for loved ones. However, with the recent changes announced in the Autumn Budget 2024, you may be wondering what this means for you and your family. These updates have understandably raised concerns, particularly around how unspent pensions will be treated for Inheritance Tax (IHT) purposes.

Unspent pensions to be brought into estates

In October 2024, Chancellor Rachel Reeves announced plans to include unused pension funds and death benefits within the value of estates for IHT purposes. For many, this news may have come as a surprise, particularly if you’ve worked hard to build a pension as a tax-efficient way to pass wealth on to loved ones. The new proposal will mean that pension administrators will be required to report and pay IHT directly to HMRC, rather than the responsibility falling on the deceased’s estate or beneficiaries.

Similarly, death-in-service benefits paid out by employers have traditionally been entirely separate from personal pensions for the purposes of calculating an IHT bill. By including death-in-service benefits and unused pensions in IHT calculations, more estates could face higher taxes.

The Chancellor also confirmed the nil-rate band (£325,000) and residence nil-rate band (£175,000) are frozen until 2030.

What Could This Mean for IHT Bills?

Below is an example of how the proposed changes could impact someone with an unspent pension pot of £500,000 at the time of death.

Before the proposed rule changes (Pre-April 2027)

• Pension Pot Value: £500,000
• IHT Liability on Pension: £0 (pensions were outside the estate for IHT purposes)
• Other Taxable Assets: £200,000
• Nil-Rate Band: £325,000
• Total Taxable Estate: £200,000 – £325,000 = £0 (no IHT payable)
• Total IHT Due: £0

Under the proposed rule changes (From April 2027)

• Pension Pot Value: £500,000 (now included in the estate for IHT)
• Other Taxable Assets: £200,000
• Total Estate Value: £700,000 (£500,000 pension + £200,000 other assets)
• Nil-Rate Band: £325,000
• Residence Nil-Rate Band: £175,000 (assuming eligibility)
• Taxable Estate: £700,000 – (£325,000 + £175,000) = £200,000
• IHT Rate: 40%
• IHT Due on Pension: £80,000 (deducted by the pension administrator before distribution)

For those with larger pension pots, the impact of these changes could be even more severe.

When are the changes being introduced?

Directly after the Budget, the government announced a 12-week technical consultation on the proposed changes (concluded 22 January). Following a review of the feedback, government consultation principles state that responses should be published within 12 weeks. By Q3 2025, the government is expected to deliver specific implementation guidance on how pensions and death benefits will be treated under the new regime, as well as how trusts will be treated according to the new rules.

Changes won’t take effect until 6 April 2027, giving you time to review and adapt your plans accordingly.

What should you be thinking about now?

When introduced, the changes will likely have the greatest impact on those with already established estate plans. A good starting point would be to review existing pension arrangements and consider how the changes could affect what your beneficiaries would receive. With the right guidance, you can ensure your estate remains tax-efficient and aligned with your goals.

What’s really important to remember though is that the IHT proposals announced in last year’s Budget are not finalised, so it’s wise to consider potential implications but await the final guidance in the Autumn before drastically overhauling plans. This still gives us ample time to make changes before implementation in April 2027.

You won’t be left in the dark about changes

According to recent research¹, an estimated 8.5 million adults aged 55 or over are unaware of the pension and IHT changes announced in last October’s Budget.

It is important to be aware of potential changes and their impact and timescales, but essentially you need to feel reassured that we are monitoring developments and will keep you in touch as we know more.

You don’t have to navigate these changes alone. When we have more certainty, we may suggest you consider alternative options that ensure your estate remains as tax efficient as possible. Together, we’ll help you secure your family’s future with confidence.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. The Financial Conduct Authority (FCA) does not regulate Will writing, tax and trust advice and certain forms of estate planning.

¹Canada Life