Inheritance tax planning has become increasingly important for individuals and families looking to protect wealth for the next generation.
One area that is often misunderstood is how pensions fit into the inheritance tax picture.
Many people assume that pensions sit entirely outside their estate and do not need to be considered as part of wider estate planning.
In reality, the position is changing, and that change could have a major impact on families, beneficiaries and long-term financial planning.
In this article, we explain how inheritance tax works, the role pensions currently play in inheritance planning, and why upcoming changes mean it is important to review your position sooner rather than later.
Prefer to listen? Play the full podcast episode below.
What Is Inheritance Tax?
Inheritance tax, often referred to as IHT, is a tax charged on a person’s estate after death.
In simple terms, it refers to the value of assets left behind after debts and liabilities are taken into account.
Broadly, inheritance tax works by applying:
- a 0% rate to the part of the estate covered by available allowances
- a 40% rate to the value above those allowances
For most people, the starting point is the standard nil rate band of £325,000.
In some cases, there may also be an additional residence nil rate band of up to £175,000, typically where a person leaves a qualifying home to children or other direct descendants.
That means the total tax-free amount can vary depending on personal and family circumstances.
How Much Can You Pass On Free Of Inheritance Tax?
The amount that can be passed on without inheritance tax depends on factors such as marital status, whether there are children, and whether a home is being left to them.
As discussed in the podcast, the broad position is:
- £325,000 for a single person
- £500,000 for a single person with children in certain circumstances
- £650,000 for a married couple or civil partners without children
- £1 million for a married couple or civil partners with children, where the conditions for the residence nil rate band are met
Anything above the available thresholds may be subject to inheritance tax at 40%.
Why Do Pensions Matter In Inheritance Tax Planning?
Pensions can form a significant part of a person’s overall wealth, especially where pension pots have been built up over many years through employment or personal contributions.
For that reason, pensions have always been relevant in inheritance planning, even where they have not traditionally been taxed in the same way as other assets.
A key issue is that many people do not review their pension paperwork regularly.
In particular, it is important to check your pension nomination form, which records who you would like to benefit from your pension on death.
What Is A Pension Nomination Form?
A pension nomination form allows you to tell the pension provider who you would like to receive any remaining pension benefits when you die.
This is particularly relevant for defined contribution pensions, such as:
- workplace pension schemes
- private pensions
- self-invested personal pensions (SIPPs)
- auto-enrolment pensions
These nomination forms are extremely important because pension death benefits do not usually pass under your will in the same way as other estate assets.
Instead, the pension trustees or provider will usually consider your nomination and decide who should receive the benefits.
Although the nomination is not always legally binding, it is often highly influential.
That is why it is vital to ensure the form is up to date, especially after major life events such as marriage, divorce, remarriage, or the birth of children.
Are Pensions Currently Subject To Inheritance Tax?
At present, defined contribution pensions are generally not subject to inheritance tax.
That means if you die before 6 April 2027, pension benefits paid from a defined contribution arrangement are not usually counted as part of your taxable estate for inheritance tax purposes.
This has made pensions a particularly useful planning tool for many families, because pension wealth could often be passed on more tax-efficiently than other assets.
However, that position is due to change.
What Is Changing From April 2027?
The podcast explains that from 6 April 2027, defined contribution pensions are expected to be brought into the inheritance tax regime.
This means that, instead of sitting outside the estate for inheritance tax purposes, pension funds will be taken into account when calculating the overall value of the estate on death.
For some families, this could make a very significant difference.
Why this matters
A person who currently appears to be below the inheritance tax threshold may, in fact, move above it once pension savings are included.
For example, someone with:
- a house and other assets worth £500,000
- a pension worth £200,000
might currently have no inheritance tax to pay if the pension sits outside the estate.
But once pensions are included, the estate value may effectively become £700,000, creating a potential inheritance tax liability on the amount above the available allowances.
That could result in a much larger tax bill than families were expecting.
How Could These Pension Changes Affect Families?
The inclusion of pensions in inheritance tax calculations could affect a wide range of people, including those who may never have considered themselves to have an inheritance tax problem.
It may particularly affect:
- individuals with moderate estates and sizeable pension funds
- unmarried couples who do not benefit from the same spousal exemptions as married couples
- people relying on pensions as part of long-term family wealth planning
- families who assumed pension funds would pass more cleanly to the next generation
The practical result is that more estates may become liable for inheritance tax and more people may need advice on structuring their affairs.
Can Inheritance Tax Planning Reduce The Tax Bill?
In many cases, yes.
Proper inheritance tax planning during a lifetime can help reduce the eventual tax burden.
However, timing is critical.
Start planning early
Many inheritance tax planning tools work best when implemented well in advance. One reason is the seven-year rule, which can apply to certain gifts made during lifetime.
Broadly speaking, if you make a qualifying gift and survive for seven years, that gift may fall outside your estate for inheritance tax purposes.
If you do not survive the full seven years, the tax position may be less favourable.
That is why leaving inheritance tax planning until later life can reduce the options available.
Watch out for practical limits
Although gifting is often discussed as a strategy, it is not always simple in practice. Some assets are easier to gift than others, and pensions are not always easy to access without triggering other tax consequences.
For example, taking money out of a pension to gift it away may create income tax liabilities, particularly where the funds are not available tax-free.
This means inheritance tax planning needs to look at the overall picture, rather than focusing on pensions in isolation.
Do You Need A Financial Adviser For Inheritance Tax Planning?
Not necessarily, but for many people, a combined legal and financial approach is the most effective.
A solicitor can help review your estate planning, family circumstances, succession wishes and legal structures.
A financial adviser may then help implement appropriate financial products or investment-based strategies.
The best inheritance tax planning is usually holistic. It looks at:
- what assets you have
- who you want to benefit
- which assets are easiest to pass on efficiently
- what risks or family complications need to be considered
- how legal and financial planning can work together
What Should You Do If You Are Unsure About Your Pension And Inheritance Tax Position?
If you are not sure whether your pension should be part of your inheritance tax planning, the sensible first step is to review your wider estate and seek advice.
You may want to check:
- the value of your estate excluding pensions
- the value of your pensions
- whether your nomination forms are up to date
- whether your will still reflects your wishes
- whether you are likely to exceed the available inheritance tax thresholds now or in the future
For some families, the changes coming in April 2027 may mean that planning, which once felt optional, becomes far more important.
Final Thoughts
Inheritance tax and pensions are becoming much more closely linked, and the expected changes from April 2027 could have a major impact on how families pass on wealth.
For many people, pensions have traditionally sat outside the inheritance tax conversation.
That is changing. As a result, it is increasingly important to review pension nomination forms, understand the likely value of your estate, and take advice on whether inheritance tax planning is needed.
Early planning often provides the greatest flexibility.
If you are concerned about inheritance tax and pensions, getting advice now can help you understand your options and avoid unwanted surprises later.
This article is based on the Monan Gozzett Firm Talk podcast. Listen to the full episode here. This written version has been adapted from the audio and edited for clarity.
Please note that we are unable to offer free legal advice. Our client services team are here to take your case details and explain any costs involved
If you would like to speak to our expert legal team about this, or any related subject then please contact our team by phone on 0207 936 6329, Email or by completing our Quick Contact Form below.
Please note that we are unable to offer free legal advice. Our client services team are here to take your case details and explain any costs involved