The Chancellor announced in the October 2024 Budget that pensions will be included in inheritance tax (IHT) calculations from April 20271. The change is expected to generate nearly £1.5 billion for the government in 2029-30, with around 8% of estates likely to be affected2. The new rules do not take effect until the 2027-28 tax year2.
From April 2027, defined contribution pensions will be brought into IHT calculations, potentially adding to an estate's taxable value if it exceeds the IHT allowance2. The rule will not apply to defined benefit (final salary) pensions, which typically cannot be passed on2. Currently, pensions can be passed to beneficiaries tax-free if the holder dies before the age of 75; if they die after turning 75, pensions are taxed as income2.
Where an estate exceeds the £325,000 IHT threshold, or £500,000 if a home is being passed to a direct descendant, any amount above that incurs IHT at 40%2. The table below, based on figures from Interactive Investor, assumes an estate that already exceeds the IHT allowance and has no nil-rate bands available to reduce the bill2.
| Pension pot at death | IHT liability | Pension pot remaining |
|---|---|---|
| £100,000 | £40,000 | £60,000 |
| £250,000 | £100,000 | £150,000 |
| £500,000 | £200,000 | £300,000 |
| £1m | £400,000 | £600,000 |
Withdrawal behaviour has shifted since the announcement. Almost half of pension pots were withdrawn at a rate of 8% or more in 2024-25, up two percentage points on the previous year and the highest proportion recorded, according to Financial Conduct Authority data1. Analysis by consultancy firm Broadstone, based on eight years of FCA Retirement Income Market Data, shows higher withdrawal rates across pots of all sizes: around 84% of savers with pots under £10,000 withdrew at least 8% last year, alongside 34% of those with pots worth £100,000 to £249,000 and 14% of pots worth £250,000 or more1.
The rise follows the Chancellor's announcement that pensions will be included in IHT calculations from April 2027, which is thought to have prompted some retirees to take out more now, either to spend or to gift to loved ones during their lifetime1. Broadstone says it is too early to be sure the figures are driving behaviour1.
"The data highlights current withdrawal behaviour but it does not capture how the rate of access evolves over the long term."
He added that some individuals may be choosing to front-load income in early retirement or meet temporary financial needs, so the headline figures need not imply a permanent, year-on-year pattern1.
Separately, almost 112,000 people took their 25% tax-free pension lump sum in the six months to March 2025, a 33% rise on the same period a year earlier, and the number withdrawing lump sums across 2024-25 was up 29% on 2023-24, with the total value climbing from £11bn to £18bn3. The tax-free lump sum allowance is currently set at 25% of a pot, up to a cap of £268,2753. There have been no official reports or proposals to reduce it, and speculation to date has come from think-tanks and commentators rather than ministers or the Treasury3.
Why it matters for households
Pension savers who die from April 2027 onwards may have defined contribution pots counted towards their estate for inheritance tax purposes, which can reduce what beneficiaries receive where the estate is above the threshold2. The change does not apply to defined benefit pensions2. People with larger pots are more likely to be affected, and the government expects around 8% of estates to be affected2.
The withdrawal data covers 2024-25, before the new rules take effect, and shows more savers taking amounts above the 4% rate often used as a guide for sustainable withdrawals1. Taking larger sums earlier can reduce a pot's ability to recover through investment growth, and withdrawals beyond the 25% tax-free lump sum are taxed as income where total earnings exceed the personal allowance of £12,5703. Taking income or a series of lump sums can also trigger the Money Purchase Annual Allowance, cutting the annual pension contribution limit from £60,000 to £10,0003.
Gifting rules are unchanged by the pension measure: up to £3,000 can be gifted each year without counting towards IHT, gifts are tax-free if the donor lives for seven years after making them, and taper relief may reduce the amount due if they die within that period2. Regular gifts from surplus income leave an estate immediately for IHT purposes provided they do not affect the donor's standard of living2.
What happens next
The pension IHT rules take effect from April 20271. The next Budget is scheduled for 26 November, at which pensions remain part of the debate about how the government could raise revenue; nothing has been confirmed3. Commentators have suggested inheritance tax rules on gifting could be tightened, and a flat rate of pension tax relief, potentially around 25-30%, has been discussed, but no changes have been announced3.
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