Investment - Articles - 1 year to go to Pensions IHT change but 9 in 10 in the dark

One year out from a major overhaul to pensions inheritance tax (IHT) rules, new Standard Life research finds 9 in 10 (89%) UK adults have little or no awareness of the change.

 

Announced in the 2024 Autumn Budget by Chancellor of the Exchequer Rachel Reeves, the reforms mean that from April 2027, most unused pension funds and death benefits will fall within the scope of IHT, becoming part of an individual’s taxable estate. Government estimates an additional 10,500 estates will be brought into paying IHT due to the change in 2027/28, with around 38,500 estates facing higher IHT bills than under previous rules.

 

While the initial impact will be felt from 2027, the combination of a frozen IHT nil-rate band until 2031, rising property prices, and growth on investments means many more families are likely to be affected in the years ahead. The OBR forecasts IHT receipts to reach £14.5bn by the end of 2030/31, an increase of around 67% from 2025/26.

 

Standard Life modelling shows that if the nil-rate band had risen in line with inflation since its freeze in 2009, it would be around £200,000 higher in 2026/27 than its current level (£527,666 vs £325,000). And looking ahead to the end of the freeze in 2030/31, the nil-rate band could be around £270,000 higher (£593,893 vs £325,000). As with the income tax freeze, the frozen nil-rate band creates a ‘fiscal drag’ effect, with more estates being pulled over the IHT threshold as asset values rise.

 

 

Neil Jones, tax and estate planning specialist at Standard Life said: “With the clock ticking on the final year before pensions fall within the scope of inheritance tax (IHT), it’s concerning, though not surprising, that awareness of the change remains so low. Most estates currently fall below the thresholds for paying IHT, which can be up to £1 million for a surviving spouse with a home, so individuals and their families often only engage with IHT when they have to. But by 2030, around one in ten estates are expected to exceed the threshold, so IHT will be something far more people will need to understand and plan for.”

 

The immediate effects are likely to be felt by Gen X, the generation currently most involved in supporting older relatives and managing intergenerational wealth. However, the research shows a substantial knowledge gap among this cohort, with only one in seven Gen X adults saying they have a ‘good’ understanding of how IHT works.

 

Industry support will be crucial moving forward. Overall, 30% of adults think their estate will exceed the IHT threshold, rising to 40% of Millennials and 36% of Gen Z. Even among those who may ultimately fall below the threshold, the current lack of understanding highlights the importance of clear insight, guidance and advice.

 

To help advisers and clients navigate the shifting tax landscape, Standard Life has recently launched a dedicated IHT hub, offering webinars, articles and practical guidance on how the reforms will impact estate planning.

 

Neil Jones continues: “With an estimated £5.5 trillion expected to pass between generations in the next 30 years, many people who never anticipated facing IHT may soon find themselves navigating complex financial and estate planning decisions. The pensions and wider industry have a key role in offering clarity on the tax rules, practical guidance, and the insight individuals need to manage their estates effectively. Professional financial advisers and estate planners play a crucial role in helping families understand how they might be affected by IHT and creating tax-efficient plans.”

 

 

Along with your will, keep beneficiary nominations (sometimes called expression-of-wishes forms) up to date so pension savings go to the right people. This makes things much simpler for those dealing with the estate and helps ensure your wishes are carried out smoothly. Some pension benefits will still be exempt from inheritance tax, for example, those left to a spouse or civil partner, or money paid to a registered charity.

 

You can transfer unused IHT allowances, both the standard nil-rate band (£325,000) and the residence nil-rate band (£175,000), to a surviving spouse or civil partner. This creates a transferable nil-rate band, allowing couples to potentially pass on up to £1 million tax-free.

 

Bringing pensions together into one place can make things easier by reducing the administrative burden when reviewing or taking money from pensions, and for the personal representative and beneficiaries when dealing with any potential IHT payments. Just be sure to check whether you’d be giving up any valuable guarantees or benefits before you move a pension.

 

Think about how you plan to use your pension in retirement. Currently, people, who can, often access their pension last because it isn’t currently subject to inheritance tax. From 2027, this will change, so looking to use these funds earlier could help reduce the amount liable to IHT payable later on. However, this needs to be balanced with longevity and investment planning, so professional advice is a good idea.

 

As pension wealth will be subject to IHT, it is important to make the balance of your estate more IHT efficient where possible. If you have enough spare savings, lifetime gifts can be a helpful way to reduce the value of an estate.

 

You can typically give away up to £3,000 each tax year free of IHT, and if you didn’t use last year’s allowance, you can carry it over for one year. This is a valuable benefit but may not make a large dent in an IHT liability, so consider gifting larger amounts. Larger gifts will typically fall entirely outside your estate if you live for seven years after making them, or immediately if they qualify as gifts made from surplus income. Gifting money does not necessarily mean you will lose access.

 

Managing wealth and understanding inheritance tax can feel complicated, so professional advice can make a real difference. A professional financial adviser or estate-planner can help people make informed choices and build a bespoke estate planning strategy covering pension and non-pension wealth, ensuring tax efficiency.