Approximately 10,500 state pensioners will be hit with unexpected tax bills following Chancellor Rachel Reeves' decision to include private pensions in Inheritance Tax (IHT) calculations from 2027. The change means that pension pots built up through workplace or private schemes will now form part of a deceased person's estate, potentially subjecting them to the standard 40% IHT rate.
How the New Rules Work
Currently, IHT applies at 40% on estates valued above £325,000 (or £500,000 if a property is included). Pensions have been exempt from this calculation, but from 2027, they will be counted as part of the estate. For those already exceeding the threshold, their entire pension could be taxed at 40%.
The government estimates that 213,000 estates will be affected in the 2027-28 financial year, with 10,500 of those facing tax bills they would not have incurred under previous rules.
Government Rationale
The 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." The move aims to close a loophole that allowed pensions to be passed on tax-free.
Administrative Burden on Families
Experts have warned that the new rules will place a significant administrative burden on bereaved families. After a death is reported, pension schemes will have four weeks to provide the estate with the value of unused pension funds and death benefits.
Steve Webb, partner at consultancy LCP and former pensions minister, told Which?: "Complications will no doubt arise where the family member cannot track down all of the deceased person's pensions or where providers are slow to supply the information needed to work out the IHT bill."
Rachel Vahey, head of public policy at AJ Bell, added: "Bereaved families face a huge administrative burden, with the government insisting they settle the IHT bill within six months. Many people have complex financial affairs, especially those who die unexpectedly, meaning settling the bill quickly may not be straightforward."
Payment of the Tax Bill
If an estate cannot pay the tax bill owed on pensions, the government proposes that the tax be paid from the deceased's other assets or by the person receiving the inheritance. This could force families to sell assets or use savings to cover the cost.
