Inheritance Tax: What Will Happen To Your Pension?

From 6 April 2027, pensions will be included as part of your estate when you pass away. This includes workplace pensions and self-invested personal pensions (SIPPs).

That means that inheritance tax (IHT) might apply to what you leave behind.

Pensions left to a spouse or civil partner will remain free from IHT.

If you’re planning to pass a pension on to a child or grandchild, however, IHT may apply.

If your pension pot pushes your estate above the IHT thresholds, anything above the limit will be taxed at 40%.

If your pension pushes your estate to above £2 million, it could reduce or remove the nil-rate band altogether.

Inheritance tax might have to be paid if a person’s “estate” is worth over £325,000 when they die.

An estate includes everything a person owned, such as:

• property (including residential and buy-to-let)
• personal possessions (e.g. their car, jewellery and collectibles)
• savings (e.g. money held in savings accounts and Cash ISAs)
• investments (e.g. assets held in Stocks and Shares ISAs and General Investing Accounts GIAs)
• certain gifts made before they passed away

If you give your home away to your children or grandchildren, the threshold increases to £500,000. Currently, the inheritance tax rate is set to 40%.

Inheritance tax is only paid on the portion of your estate that lies above the threshold. It doesn’t apply to the total value of your estate.

Here’s an example of how it works:

• Your estate is worth £525,000
• The IHT threshold is £325,000
• IHT applies to £200,000 of your estate (£525,000-£325,000)
• Your estate pays £80,000 (40% of £200,00

It might be possible to reduce how much inheritance tax is due by:

• Transferring to a spouse or civil partner
  Leaving your estate to a spouse or civil partner usually means that inheritance tax won’t apply.
• Donating to charity
  Leaving at least 10% of the taxable value of your estate to charity in your will could reduce your inheritance tax bill to 36%.
• Setting up a trust
  Putting assets into certain types of trust could mean they are no longer subject to inheritance tax. (However, there may be other types of tax for the heirs to pay.)
• Gift giving
  You won’t have to pay inheritance tax on gifts of up to £3,000 each tax year during your lifetime. (The tax year runs from 6 April to 5 April the following year.)
• Pay into a pension (for now)
  Pensions are currently exempt from inheritance tax. However from 6 April 2027 they will be included as part of a person’s estate (more on this later!)