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Inheritance Tax Changes: Will Your Private Pensions Be Subject to Inheritance Tax?

In the recent Autumn 2024 Budget, the Chancellor announced a wide range of changes to how inheritance tax will be calculated in the future, including changes to the inheritance tax treatment of pensions. If you have a private pension, it is vital that you consider these recent announcements.

1) What is the current position regarding private pensions?

Inheritance tax is not usually payable on any unused private pension funds, as most pensions are not considered part of a person’s estate for inheritance tax purposes.

2) How does the current position work?

Most people will have completed a nomination form when they started their pension. This form outlines who you wish to benefit from your pension upon your death. It is this nomination form—not your Will—that determines what happens to your pension. Pension Trustees (i.e., pension providers) generally follow the instructions set out in the nomination form.

Although Trustees usually follow the nomination form, the pension is paid out at their discretion. As such, the pension is not regarded as part of the deceased person’s estate because there is no automatic entitlement for the named beneficiaries.

3) What changes did the Chancellor announce in the Autumn 2024 Budget?

In the Autumn 2024 Budget, the Chancellor announced that, from 6th April 2027, the treatment of pensions for inheritance tax purposes will change. From this date, most unused private pensions and death benefits will be considered part of a deceased person’s estate and will therefore be included in inheritance tax calculations. Pension Trustees will also be required to report and pay any inheritance tax due on a pension to HMRC.

4) What does this mean?

From 6th April 2027, if you have a pension with unused funds or death benefits, these are likely to be treated as part of your estate for inheritance tax purposes. This change is likely to increase the amount of inheritance tax payable.

For example:

  • If Ryan dies before 6th April 2027, his estate is worth £550,000, comprising a house, savings, and shares. He also has a pension worth £200,000, which is not included in his estate. Ryan is not married and has left his estate to his children.
    Under the current rules:
    • Ryan benefits from a nil-rate band of £325,000 and a residence nil-rate band of £175,000 (as he owned a main residence and left his estate to his children).
    • This gives Ryan a total tax-free threshold of £500,000.
    • Only the £50,000 exceeding the tax-free threshold is subject to inheritance tax at 40%, resulting in a tax bill of £20,000.
  • If Ryan dies after 6th April 2027, his £200,000 pension will be included in his estate. This increases the value of his estate to £750,000.
    • The amount exceeding the tax-free threshold is now £250,000.
    • This would result in inheritance tax of £100,000 (£250,000 x 40%).
    • This is an increase of £80,000 compared to the current rules.

5) What should you do?

You must review your estate planning to reduce any inheritance tax liability and ensure your Will is up to date. With the help of accountants and our Wills and Private Wealth service, we can help structure your estate to minimise inheritance tax as much as possible.

Please get in touch with the Private Client department by phoning 02920 345 511 or emailing estateplanning@berrysmith.com.