Your pension - what will the Inheritance Tax change mean for you?

Pensions are one of the most tax efficient ways to invest. As well as tax relief on the money you put in, any growth within the pension is largely tax free and under the current rules, in most cases there is no Inheritance Tax on any money left in your pension on death.

However, the Inheritance Tax benefits of pensions are set to change. In the Autumn Budget the Chancellor announced proposals to include any unspent pensions benefits in the owner's Inheritance Tax calculation from 6th April 2027. 

Will this impact me?

If you’re married or in a civil partnership and your spouse/civil partner benefits from your pension on your death, you won’t need to pay Inheritance Tax on it, as anything you leave to your spouse or civil partner is normally exempt.  

If someone other than your spouse or civil partner benefits, Inheritance Tax may be payable depending on the value of the assets you leave behind when you die and any non-exempt gifts you made in the previous seven years.

How does Inheritance Tax work?

Inheritance Tax is only payable if the value of your estate (the value of your assets less any allowable borrowings plus any non-exempt gifts made in the previous years) exceeds your available tax-free allowances. 

Each of us is entitled to a tax-free allowance (known as the nil rate band) of £325,000. In addition, you may be entitled to an extra tax-free allowance of £175,000 if leaving a share of your home to a ‘direct descendant’ which includes your children or grandchildren. This is known as the ‘Residence nil rate band’. 

If your spouse or civil partner predeceases you, leaving all their assets to you, you may be able to take advantage of their £325,000 nil rate band, allowing you to leave up to £650,000 tax free. You may also be able to benefit from their unused Residence nil rate band, meaning you may be able leave up to £350,000 of the value of your home free of Inheritance Tax.

There are reliefs available if passing on qualifying agricultural or business property, but these are set to be capped from April 2026.

After the deduction of any reliefs and after applying any tax-free allowances, Inheritance Tax is charged at 40%.

Will my beneficiaries pay Income Tax on my pension benefits?         

Under the current rules, if you die before age 75 any benefits paid from your pension would normally be paid free of Income Tax. If you die from age 75 the money your beneficiaries take from your pension will be added to their other income and subject to Income Tax. 

Under the new proposals, from 6th April 2027, if you die from age 75 your pension benefits may be subject to both Inheritance Tax and Income Tax.   

What should I do?

It’s important to remember that proposals are not yet law and we await the final details. In most cases money held in pensions will remain protected from Inheritance Tax until 6th April 2027.

Taking money out before the new rules take effect may mean you increase any potential Inheritance Tax liability. 

If Inheritance Tax is a concern, it's important to take advice. An NFU Mutual Financial Adviser can discuss this with you based on your own circumstances.