Pensions are set to become subject to inheritance tax (IHT) under reforms announced in last month’s Autumn Budget.
The change is expected to generate nearly £1.5 billion for the government in 2029-30, with around 8% of estates likely to be affected.
The new rules won’t come into force until the 2027-28 tax year, giving you the opportunity to plan ahead.
Read on to find out our top tips on navigating the upcoming changes – and making the most of your retirement savings.
Key changes for pensions in the Autumn Budget
From April 2027, defined contribution pensions will be brought into inheritance tax calculations, potentially adding to your estate’s taxable value if it exceeds the IHT allowance.
Currently, pensions can be passed to beneficiaries tax-free if you die before the age of 75. If you die after turning 75, pensions are taxed as income.
This new rule will not apply to defined benefit (final salary) pensions, which typically cannot be passed on.
- Find out more: inheritance tax to be levied on pensions
How the changes may impact you
If your estate exceeds the £325,000 IHT threshold (or £500,000 if you’re passing your home to a direct descendant), any amount above this will incur IHT at 40%.
For example, assuming an estate has no nil-rate bands available to reduce IHT, a pension pot valued at £100,000 at death would incur a £40,000 tax bill.
The table shows the potential impact the rule changes could have on your pension, depending on its size.
Source: Interactive Investor. Assumes the estate exceeds IHT allowance.
- Find out more: inheritance tax rates and thresholds
5 tips on managing your pension
Now the dust has settled on the Autumn Budget, here are five steps to help you make the most of your retirement savings before the new rules come into force.
1. Make the most of your gift allowances
You can avoid inheritance tax by spending or gifting your money during your lifetime. Gifts are tax-free if you live for seven years after making them, and if you pass away within this period, taper relief may reduce the amount of IHT due.
You can gift up to £3,000 each year without it counting towards IHT, and additional exemptions apply for weddings. Any unused annual exemption can also be carried over to the next tax year, but only once.
You can also gift regularly from surplus income, meaning these gifts leave your estate immediately for IHT purposes, as long as they don’t impact your standard of living. You’ll need to keep records of the amounts and dates of gifts and show they’re made regularly.
Before making substantial gifts, it’s essential to consider your long-term needs, including potential care costs in later life.
- Find out more: inheritance planning and tax free gifts
2. Consider a guaranteed income
The Budget changes mean more people will look to spend down their pensions rather than leave them untouched, according to Helen Morrissey, head of retirement analysis at the investment firm Hargreaves Lansdown.
She says: ‘We may see an increased interest in annuities, as people look to secure a guaranteed income while also keeping their estate below the inheritance tax threshold.’
An annuity allows you to convert your pension savings into a steady income for life, potentially reducing the taxable portion of your estate.
Annuity rates have risen in recent years, although they may drop as the base rate falls.
- Find out more: best annuity rates
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3. Speak to your provider if you’ve withdrawn cash
Many pension savers withdrew funds early, amid rumours that the 25% tax-free lump sum would change in the Autumn Budget, but this didn’t come to pass.
Interactive Investor reported a 58% year-on-year increase in withdrawals from self-invested personal pension (SIPP) accounts in September.
If you took cash out ahead of the Budget and are reconsidering, your provider may offer a cooling-off period, often 30 days, allowing you to reverse the withdrawal. Your eligibility depends on when and how you accessed your tax-free cash, so it’s best to check with your provider.
If you’re considering reinvesting withdrawn funds back into a pension, such as a SIPP, you should proceed with caution. Reinvesting could trigger recycling rules, which prevent individuals from repeatedly claiming tax relief on pension contributions.
- Find out more: how to take a lump sum from your pension
4. Contribute to a loved one’s pension
Pension recycling rules don’t apply if you contribute to someone else’s pension, so it could make sense to top up your partner’s pension or a child’s Junior SIPP to support their retirement savings.
You can contribute up to £2,880 per year into their pension, and with tax relief, this amount is boosted to £3,600.
This approach can also help reduce the size of your own estate, potentially keeping it below the inheritance tax threshold.
5. Seek professional advice
With the upcoming changes in mind, now might be a good time to review your retirement strategy with a professional.
Independent financial advisors are authorised to give you advice and recommend suitable pension products and investment options.
For free and impartial guidance, services such as MoneyHelper, Citizens Advice and Pension Wise (for those over 50) offer resources to help you navigate the pension system.
- Find out more: how to get retirement advice
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