Inheritance Tax and your pension savings – what’s changing?

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A major change is coming to what’s included in your estate for inheritance tax purposes. And it’s something that could affect how much of your pension pot your loved ones end up inheriting. Because from April 2027, unused pension funds and death benefits are going to be considered as part of the overall value of your ‘estate’ for the first time. These changes won’t just affect people approaching retirement - they could matter for anyone building a pension, or anyone who may one day inherit one.  So why the change and what does it mean for you?

 

What’s changing?

Your estate includes things like property, possessions, some types of savings and investments.

Inheritance tax (IHT) is currently charged at a rate of 40% on estates worth more than £325,000 – that’s the tax-free threshold, also known as the nil rate band. The tax only applies to the amount over the threshold, rather than the total value of your estate.

If you want to pass on your home to your children or grandchildren, your individual threshold can rise to a total of £500,000. This is because the government provides an extra inheritance tax allowance called the residence nil-rate band, to make it easier for families to pass on the family home to their direct descendants without paying inheritance tax.

Right now, any unused pension savings and death benefits aren’t considered part of your estate. So they’re not subject to IHT. But from 2027, these will be counted.

If you’ve been saving up for decades, there could be tens or even hundreds of thousands of pounds in your pension pot. That means your estate could potentially be bumped above your threshold, and so that 40% tax would apply to your estate when you die.

In a nutshell, this is a significant change that means IHT will apply to more estates. 

 

Why the change?

After the 2015 ‘pension freedoms’ reforms, pensions have been an increasingly popular way of transferring wealth on someone’s death. The upcoming change to include pension pots and death benefits is coming in as the government looks to encourage people to use their pensions to fund their retirement, rather than as a tax planning vehicle to transfer wealth.

 

Will it affect me?

The 2027 change will affect you if the total value of your estate – including any unused pension savings or pension death benefits – exceeds your threshold.

 

How to start planning ahead

The government is still to confirm the full details of how this change will work. But there are things you can think about now to help make sure you leave behind more than a sizeable tax bill.

• Maybe you were hoping to leave as much of your pension as possible untouched for your loved ones? If so, with the changes coming in, you might want to consider if that’s still the right choice for you. Or perhaps now you could think about spending more of your pension savings during your lifetime and using them to support the lifestyle you want.  
• One way to lower the value of your estate for IHT purposes is by gifting while you’re still alive. You can gift up to £3,000 in a tax year without it being added to the value of your estate. But there are different rules, so it’s best to find out first what you can and can’t do with your cash, shares, property and so on. You can read more about your annual gifting exemption and other gifting allowances at MoneyHelper.
• You might want to consider getting advice from a financial adviser. They will be able to help you with pensions and estate planning based on your individual circumstances. And could save you a lot of time, money and stress. MoneyHelper is a good place to go to find out more about choosing the right adviser for you.

Everybody of course wants their loved ones to benefit, rather than the taxman. Reviewing your estate plan and assessing your overall wealth, including all your pension pots, can help you estimate what your potential IHT situation might be under the new rules.

The key is a little more thought now, so you have as much time as possible to make sure your estate planning is on track to meet your wishes.

 

Your pension and your Will

It’s also worth remembering that your pension isn’t usually covered in your Will currently. But pension providers normally give you the option to nominate your beneficiaries. This is something you can do online, on the provider’s app or by filling out and returning a form. You could check with your provider if you’re not sure.

You can nominate beneficiaries for your Standard Life plan via our online services, or via our app. Take a look at our support page for FAQs and ways to get in touch.

It's important to check that your beneficiary information is up to date on all your pension plans – both current and old. Relationships change over time, so make sure the beneficiaries on your plans reflect your wishes. Your beneficiaries can be different on different pension plans if you’d like. And although your provider isn’t legally bound by your wishes, they’ll take them into account. However, even if your beneficiaries are clearly nominated, remember that pension benefits may still form part of your estate for inheritance tax purposes from April 2027.

 

One thing that’s not changing…

Pension plans are still a great way to save tax efficiently for your future and fund the kind of life you want in your retirement. In advance of the IHT changes, now’s the time to think ahead and see what you can do to reduce the impact of IHT so your family can make the most of what you leave behind.

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The information here is based on our understanding in March 2026 and shouldn’t be taken as financial advice.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

Standard Life accepts no responsibility for information on external websites. These are provided for general information.

A pension plan is an investment. Its value can go down as well as up and could be worth less than was paid in.