State pensioners have six months left before private pensions become included in Inheritance Tax calculations for the first time, potentially losing up to 40% of their pension pots when they die.
Currently, Inheritance Tax applies a 40% charge to the value of an estate above £325,000 (or £500,000 including a property), covering cash, savings, investments and property. There is no tax on the first £325,000 (or £500,000), but 40% is lost on every £1 above the threshold. At present, private or workplace pension pots built up from earnings are not included in the estate value.
Changes from 2027
From 2027, under changes introduced by former Chancellor Rachel Reeves, private pensions will be included in the estate calculation. For those who have already used up their Inheritance Tax allowance, the entire pension could be subject to 40% tax if it sits entirely above the threshold.
The Government said the change aims to prevent people using pensions to avoid Inheritance Tax. HM Treasury stated: “This change has been introduced to prevent pension schemes from being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for their intended purpose of funding retirement.”
Expert advice
Neil Jones, tax and wealth planning specialist at Standard Life, is urging people not to “rush into any decisions” that could have “long-term consequences” for their money.
He said: “Six months out from the pensions IHT change, preparations for affected clients will be well underway, with the focus shifting to reviewing updated plans and making any final adjustments.”
Jones added: “The change comes against a backdrop of record monthly IHT receipts in June 2026, with the frozen nil-rate band and rising asset values bringing more estates into the scope of IHT. Including pensions will widen the potential IHT exposure further, creating the conditions for a ‘perfect storm’, with annual receipts projected to rise from £8.7bn in 2025/26 to £14.5bn by 2030/31.”
He noted that advisers estimated around 40% of clients would require a review of their financial plans ahead of the change, covering areas such as retirement income, alternative products like bonds or trusts, and gifting strategies. “The next six months will be about refining plans rather than rushing into decisions that could have long-term consequences,” he said, adding that pensions are designed to provide sustainable income throughout retirement and the majority of estates will remain unaffected.
