Families could end up inheriting less from loved ones under changes announced by Chancellor Rachel Reeves that are due to bring unused pension savings into the inheritance tax system from April 2027. The change could reshape how pension wealth is passed on to loved ones, as pensions are often among the largest assets people leave behind.
For years, many savers have viewed pension pots as one of the more tax-efficient ways to transfer wealth to children and other beneficiaries. Once the new rules take effect, however, some families could receive less from an inheritance than they might have expected under the current system.
What Is Changing?
The measure was announced in the Autumn Budget 2024 and is due to take effect from 6 April 2027, although details of how the rules will operate continue to be refined. Under current rules, unused pension savings are often treated differently from other assets when someone dies. Depending on the circumstances, pension funds can frequently be passed on without being subject to inheritance tax in the same way as property, investments or cash savings.
From April 2027, most unused pension funds and death benefits are due to be included within a person's estate for inheritance tax purposes. That means some inherited pension wealth could become subject to inheritance tax, which is generally charged at 40% above applicable thresholds.
Impact on Families
For many families, this is about more than tax policy. A pension pot built up over decades can represent a substantial part of someone's legacy. Where pension savings make up a large share of an estate, the amount ultimately passed on to beneficiaries could be reduced. The issue may be particularly relevant for households that have focused on growing pension wealth as part of their long-term financial plans, assuming more of that money would eventually be passed to future generations.
Estate planning can involve a range of tools, including pensions, trusts, savings and property ownership arrangements. Each is treated differently for tax purposes and may play a different role depending on an individual's circumstances.
What Should You Do?
While there is no need for immediate action, people with larger pension pots may wish to keep up to date with developments and review beneficiary nominations to ensure they reflect their wishes before the new rules take effect. A spokesperson for insurance experts Life Pro added: “For many people, pension savings are intended to support not only their retirement but also the family they leave behind, so changes to how those savings are treated for inheritance tax purposes could have a significant impact on what loved ones ultimately receive. Where inheritance planning is concerned, it is often worth understanding how different assets are treated and what options are available. As the 2027 changes approach, some people may decide to review their plans to ensure their wishes are carried out and their families are supported in the way they intend.”
