Budget 2024: pensions brought into inheritance tax from 2027

01 November 2024

Written by Retirement Line

Page last updated: 13th November 2024

Pension savings will be considered part of someone’s estate and liable to inheritance tax (IHT) from April 2027. That was the main pensions news arising from the Chancellor’s Autumn Budget of 30 October.

Currently, your beneficiaries won’t pay any IHT on pension savings you leave to them. That’s because pensions aren’t included when the value of your estate is calculated. 

But the big change announced in the Budget by Chancellor Rachel Reeves is that, from April 2027, pension funds will be included in estates for IHT purposes. This means that your beneficiaries could be liable for IHT when inheriting your pension, subject to the IHT threshold.

The change in the pension rules is part of a package of IHT reforms designed to raise £2.5 billion per year by 2029/30.

How will IHT on pensions work?  

The IHT threshold stays the same and only estates typically worth more than £325,000 are liable to IHT. This increases to £500,000 where a residence is passed on to direct descendants. In addition, unused thresholds can be inherited by a surviving spouse or civil partner, potentially allowing up to £1m to be received by direct descendants free of IHT.

These IHT thresholds stay the same and only assets over the thresholds are subject to 40% IHT.

But it is important to recognise that IHT is NOT payable if you leave your estate to your spouse or civil partner. There are some additional IHT reliefs and exemptions explained on the gov.uk inheritance tax page. 

This new rule will mean that pension savings in various forms could be typically subject to IHT, when left to someone other than a spouse or civil partner, where the total estate is over the IHT thresholds described above. The government has published a list of 18 pension death benefits that will fall into the IHT umbrella from 2027, including:

• Money sitting in a defined contribution pension scheme.

• Money within a drawdown pension fund.

• Lump sum death benefits from a drawdown scheme.

• Income from an annuity.

• Lump sum death benefits from an annuity.

A 12-week technical consultation is now under way to give the industry an opportunity to express views on the process required to implement the changes. Retirement Line will contribute to the consultation by raising questions about the practicalities of IHT being liable on annuity income.

The government’s response to the consultation is expected in 2025, along with the draft legislation for the IHT changes. We will monitor news from the government and post further updates and clarification as more details are confirmed.

Income tax on inherited pensions

Another aspect of tax and pensions is income tax. Currently, if you pass away after the age of 75, those inheriting your pension are liable for income tax at their marginal rate on any withdrawals they make, whereas there is no income tax charge for those dying under the age of 75.

Our understanding is that money received from a deceased’s pension will still be liable to income tax, although it isn’t clear whether the ‘age 75’ rule will remain. Again, this is an issue we are monitoring and will report on once the matter is clarified.

Chancellor leaves tax-free cash rules unchanged

On 21 October we looked at other possible changes to the pension rules that the Budget might have had in store. These included speculation about tax on pension contributions, employers’ National Insurance on workplace pension contributions, and changes to the amount of tax-free cash that people can take when accessing their pension savings.

Despite rumours and speculation on these matters, the Budget included no mention of them. 

Helping you reach the right decision about your retirement income

If you believe the time is right for you to access your defined contribution pension pot then please call us on 0800 652 1316 or request a free call back from one of our annuity specialists. 

Our Annuity Specialists can carefully explain all of your options, and provide a comparison of annuity quotes at the leading providers’ latest annuity rates. As the UK's largest annuity broker*, we help thousands of people each year secure the highest available guaranteed income from their pension savings.

You can also get help from Pension Wise, the government-backed guidance service for people aged over 50. Retirement Line can also introduce you to a regulated financial advisor for further help with your retirement planning and income choices. 

Image of Rachel Reeves from gov.uk under the Open Government Licence