While headlines focus on UK fiscal woes and budget battles, a seismic tax change is flying under the radar: from 6 April 2027, defined contribution (DC) pensions will be pulled into the inheritance tax (IHT) net. Announced in the Autumn Budget 2024 by Rachel Reeves, this shift could hit 1 in 5 DC pension holders—six times more than today.
What’s Changing?
- DC pensions (money purchase plans) will count as part of your estate for IHT.
- Spouse transfers remain tax-free, but legacies to children after both parents die will be taxed.
- Defined benefit pensions (secure income) are unaffected.
Why It Matters
This is the biggest pension tax shake-up in 35 years. Many middle-income savers now face unexpected IHT bills. Furthermore, those dying after 75 will be hit with double taxation: IHT on the pension pot and income tax on beneficiary drawdowns.
Example: Susan from Scotland
Susan (60), unmarried, retiring, and has one son (25), has:
|
Asset |
Current Situation |
April 2027 (assuming values remain the same) |
|
House |
£550,000 |
£550,000 |
|
Cash |
£39,000 |
£39,000 |
|
ISA |
£204,000 |
£204,000 |
|
Pension (DC) |
£800,000 (Not included in IHT) |
£800,000 (Now included in IHT) |
|
Total Estate |
£793,000 (excluding Pension) |
£1,593,000 |
|
IHT Exemptions |
(£500,000) |
(£500,000) |
|
Taxable Estate |
£293,000 |
£1,093,000 |
|
Potential IHT Bill (40%) |
£117,200 |
£437,200 (+273%) |
Source: Quilter
What Susan Could Do
- Put PCLS (25% tax-free portion of Pension) (£200k) into trust: regains nil rate band after 7 years.
- Draw down £22k/year: reduces pension size and IHT exposure.
- Result: legacy to son increases by 24% (£572,000).
What You Should Do
- Start planning early—ideally from your mid-50s.
- Use trusts to shelter assets and regain exemptions.
- Consider life insurance to cover future IHT bills.
- Review your drawdown strategy—pension first may now be best.
Without action, your pension surplus could become a Treasury windfall. Delay is expensive, and procrastination can be costly.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
Please note that the Financial Conduct Authority do not regulate will writing, tax planning and trusts.
Approved by 2plan wealth management Ltd 06/11/25
FP36297