Inherited pensions will be subject to IHT from 2027

Inherited pensions will move into the scope of inheritance tax (IHT) from April 2027, chancellor Rachel Reeves has confirmed.

This decision, she added, was a result of the previous Conservative government’s abolition of the lifetime allowance (LTA).

Reeves also used her first Budget to announce IHT thresholds will be frozen until 2030.

She said she would be extending the current freeze by two years from the previous government’s 2028 commitment.

Reeves said: “That means £325,000 of any estate can be inherited tax free, rising to £500,000 if the estate includes a residence passed to direct descendants and £1m when a tax free allowance is passed to a surviving spouse or civil partner.”

Standard Life retirement savings director Mike Ambery said: “It’s perhaps no surprise that the government has decided to bring pensions into scope for inheritance tax as their exemption was little-known to the public.

“However, pensions have been seen as useful tool for estate planning and there will be individuals and families who have approached retirement and estate planning based on existing rules.

“Now, the value of pension pots will be added to the total value of other assets and if over the IHT threshold of £325,000, aside from other exemptions, will be taxed in the same way.

“This represents a fundamental shift to how wealthier individuals think about accessing their money in retirement. At present it makes more sense to access ISAs and other forms of saving before touching pensions.

“In time we’re likely to see more pensions, accessed earlier to prevent them from becoming part of people’s IHT bill at a later date.”

He said that the end result of this change is that many more people will now be brought into scope for IHT.

Abrdn head of savings policy Alastair Black added: “It seemed inevitable we would see some changes to IHT, and bringing pensions into the estate seemed a likely choice for government looking to increase revenue. But this will be very disappointing to some as they made financial decisions based on the previous rules, with no chance to reverse any of those decisions.

“This was a measure that a fifth of advice industry professionals we polled ahead of the Budget said were among the most disruptive things the chancellor could do for client plans. There is a real risk that this stirs up some controversy if it’s seen as double taxation.

“Currently, most pensions are passed on after the age of 75, at which point those inheriting the pension need to pay income tax on the money they receive. Adding IHT on top of this could see the estate and the recipient paying tax twice between them on a proportion of the same pounds.

“It certainly adds new complexity to estate planning, and will increase demand for advisers’ help in developing more sophisticated strategies.”