From April 2027, unspent pensions will be considered part of your estate and subject to inheritance tax. The Office for Budget Responsibility estimates that 153,000 estates will be affected by these changes.
Under the current rules, if you die aged 75 or over, tax is paid on your pension at your loved ones’ personal income rate. However, proposed changes mean that your pension (now considered part of your estate) will be taxed at the inheritance tax rate of 40 per cent above the £325,000 threshold.
The inheritance tax threshold has been frozen since 2009, despite rising inflation and property prices. This, combined with unspent pensions becoming part of an estate, means that more people will be hit with large inheritance tax bills.
When a person dies, everything they own becomes a part of their estate. For business owners, this includes business assets, cash, business premises – and now any unspent state pension. Any of this that sits above the £325,000 threshold will be taxed.
Over half of retirees plan to spend more of their pension
To avoid loved ones being left with higher tax bills, more retirees are spending their pensions on themselves. A recent survey from wealth management firm RBC Brewin Dolphin reveals that 56 per cent plan to spend more of their pension – rather than pass it down to loved ones.
Three quarters went on to say that they plan to go on more holidays, with another 40 per cent revealing they want to spend it on experiences with their family.
Over a third (39 per cent) plan to gift their pension to their family. But if you do this, it’s important to remember the rate of tax paid will depend on the time of your death.
| Years before death that the gift was made | Tax rate |
| 0-3 years | 40% |
| 3-4 years | 32% |
| 4-5 years | 24% |
| 5-6 years | 16% |
| 6-7 years | 8% |
| 8 years | 0% |
Pensions ‘openly used to transfer wealth’
Despite the controversial nature of the changes, the government has shown no signs of going back on the proposals.
An HM Treasury spokesperson said: “We continue to incentivise pensions savings for their intended purpose – of funding retirement instead of them being openly used as a vehicle to transfer wealth – and more than 90 per cent of estates each year will continue to pay no inheritance tax after these and other changes.”
More on inheritance tax and pensions
- Pension changes 2025 – a guide for small businesses
- Self-employed pension guide – how (and why) to get saving
- Will writing for small businesses – how to plan ahead
- Business property relief – a guide for small business owners
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