State pensioners face a “triple blow” of pension threats under new rules from the Labour government, with unused pension pots set to be drawn into the inheritance tax system from April 2027. The change could see households lose as much as 91% of inherited pension savings, according to analysis by NFU Mutual.
The tax will only apply if the estate exceeds the general £325,000 tax-free allowance, supplemented by the additional £175,000 residence nil-rate band, provided it is left to direct descendants. Married couples can pool their tax-free allowances, allowing them to hand over up to £1 million without incurring inheritance tax.
How the new pension tax rules work
Under the upcoming changes, unused pension pots will be included in the value of an estate for inheritance tax purposes. Previously, pensions were not subject to any inheritance tax, and the residence nil-rate bands would apply to the estate. However, the pension addition could dramatically hike the estate’s value, wiping out the residence nil-rate band completely.
For estates worth over £2 million, the residence nil-rate band is tapered away at £1 for each £2 over the threshold. Once it is completely eliminated, the couple are left with just their joint £650,000 basic allowance.
Triple tax blow warning for families
Sean McCann, chartered financial planner at NFU Mutual, warned: “The changes from April will mean some families will be hit with a triple tax blow, through a combination of inheritance tax on the pension, loss of the tax break on the family home and additional income tax if their loved one dies after age 75.”
Those inheriting a home could be hit by yet another extra cost if a loved one dies after 75, triggering income tax on pension withdrawals. This could significantly reduce the amount passed on to beneficiaries.
Steps to mitigate the impact
McCann added: “There are steps you can take to mitigate the impact, including ensuring you take your tax-free lump sum before age 75. While it may still be subject to inheritance tax, it will avoid an additional income tax charge.”
The changes are set to take effect from April 2027, giving families time to review their pension arrangements and estate planning. However, the warning highlights the potential financial strain on households with significant pension savings.
