Every year, the buildup to the next Autumn Budget sees constant headlines surrounding rumours about tax changes; this year is no different and may last a little longer given the slightly later than usual Budget date of 26 November 2025.

Whilst the rumours still swirl, headlines are still being dominated by one major change announced in the 2024 Autumn Budget by Chancellor Rachel Reeves.

To refresh, in case you missed it, it was announced that from 6 April 2027, unused pension funds would be included in an estate for IHT purposes.

While these changes don’t take effect until April 2027, they are a major shift in estate planning and deserve your attention now.

Here we take a look at what is changing and how you might need to adjust your Financial Plan.

The Current Rule (Up to April 2027)

For most people, since April 2015, a pension pot was one of the most tax-efficient ways to pass on wealth. When you died, the value of your unused pension was generally kept outside of your estate and was therefore exempt from IHT. Your beneficiaries would typically only pay Income Tax, depending on your age when you died.

The New Rule (From April 2027)

From 6 April 2027, most unused pension funds and pension lump sum death benefits will be included in the value of your estate for Inheritance Tax purposes.

If your total estate (including your home, savings, investments, and now your pension) exceeds the IHT thresholds (currently £325,000, or up to £1 million for married couples/civil partners passing on a home to children), a 40% IHT charge may apply to the pension funds.

The government’s stated aim is to ensure pensions are used primarily for retirement income, rather than as a vehicle for tax-free wealth transfer.

What about the past?

Whilst the proposed changes are far from ideal, it is worth considering how pensions were treated prior to April 2015.

For most people who died before their 75^th birthday, if they had started taking any income or tax-free cash, their remaining pension pot would have had a flat 55% tax charge if it had been paid out as a lump sum to anyone other than a financial dependent. The table below provides an oversight:

Fund Status	How it was Paid Out	Tax Charge to Beneficiary
Uncrystallised (Pension untouched)	Paid out as a Lump Sum.	Tax-free (as long as it was within the deceased’s Lifetime Allowance).
Crystallised (Already in Drawdown)	Paid out as a Lump Sum.	55% Special Lump Sum Death Benefits Charge. This was the notorious “death tax.”
Crystallised (Already in Drawdown)	Paid out as an Income (to a Dependant).	Taxed at the Dependant’s Marginal Rate of Income Tax.

When a person died on or after their 75th birthday, the rules were generally simpler but less favourable:

Fund Status	How it was Paid Out	Tax Charge to Beneficiary
Crystallised or Uncrystallised	Paid out as a Lump Sum.	55% Special Lump Sum Death Benefits Charge.
Crystallised or Uncrystallised	Paid out as an Income (to a Dependant).	Taxed at the Dependant’s Marginal Rate of Income Tax.

Therefore, before the current rules, the 55% tax charge severely limited the appeal of leaving an unused pension pot as a legacy. And it is worth considering that in some instances, the new rules would still be better than the situation prior to April 2015.

Adjusting Your Financial Planning Strategy

With the changes coming, the financial planning scenery is changing, and it is important to review all plans impacted.

The first consideration is what are the real objectives for the funds? Have pensions been used for wealth transfer simply because of the rules, which, when altered, mean we need to revisit what the objective is now? This could have changed, and this will be different from person to person.

Do you need to restructure how your income is funded?

There are a whole host of questions and considerations, there is no “golden bullet” which will negate the change. The following table provides some examples of current strategy and a potential alternative from April 2027.

Area of Planning	Pre-2027 Strategy	Post-2027 Considerations
Retirement Drawdown	Use other assets (ISAs, savings) first and leave the pension pot until last to maximise the IHT-free transfer to beneficiaries.	Drawdown strategy is now ‘IHT Neutral’. You might now prefer to use your pension first to fund retirement and keep your other assets (like ISAs) for potential gifting or other purposes.
Estate Gifting	Focus on gifting assets that were already subject to IHT (e.g., cash, investments) to start the 7-year clock for IHT exemption.	Gifting becomes more important. You might need to make more use of annual gift allowances, wedding gifts, and gifts from surplus income to reduce your overall taxable estate. This may be linked to starting to take an income from pensions.
Insurance	Less need for ‘IHT-mitigation’ life insurance specifically to cover the pension pot.	Life Insurance may be suitable. Taking out a ‘whole of life’ policy, written into a trust, can provide a tax-free lump sum to beneficiaries to cover the IHT bill on the pension and other assets, ensuring your loved ones receive the full intended value. However, this is really linked to what your overall objectives are.
Will and Nominations	Pension Nomination Forms were the primary method, overriding the Will for the pension.	Review everything together. Ensure your Will and your Pension Nomination Forms align perfectly with your wishes, as the executors of your Will, will be responsible for reporting and paying the IHT bill on the pension funds.

Where does this leave us?

This is the most significant change to pensions we have seen since 2015, and for many of our clients, it will result in reviewing objectives and adjusting their Financial Plan.

Nevertheless, with tax relief available on contributions and no income or capital gains tax on investment growth within the pension fund, pensions remain a tax-efficient savings vehicle; the change in IHT treatment does not outweigh the other tax advantages of making pension contributions for most people.

This change in legislation reinforces why it is important to have a range of portfolios which are taxed differently, as this allows flexibility to react to any changes which have an impact on planning strategies used.

We will be discussing this as part of our annual review meetings, considering potential alternative strategies, and whilst we may not recommend action before April 2027, it is important to start the discussions now as there may be further considerations and thoughts around your overall objectives.