The Estate Registry Says Inclusion of Unused Pension Pots in Inheritance Tax Could Fundamentally Change Estate Planning for Future Generations
The Chancellor’s plans to bring unused pension pots into Inheritance Tax scope is likely to distort retirement planning and diminish incentives to save in future.
That’s the warning from The Estate Registry, which provides Inheritance Tax (IHT) Loans to bereaved families through its UK service, InheritNOW.
Inheritance Tax (IHT) is a tax paid on the estate of a deceased person, which includes money, property, and possessions. It must be paid prior to probate being granted and, therefore, ahead of the disposal of property assets. Currently, only one in 20 estates in the UK are liable for inheritance tax.
Pensions, specifically defined contribution pension pots, are currently treated favourably under IHT rules. These pension pots, if left untouched until death, can be passed on free of IHT and sometimes even free of income tax, depending on the age at which the person dies. However, from April 2027, the Treasury has confirmed that pension pots will be brought within the scope of IHT.
Howard Enders, Chief Operation Officer at The Estate Registry, whose InheritNOW product provides inheritance tax loans that pay HMRC directly, says: “This will have wide-ranging effects on retirees, beneficiaries, pension planning, and tax revenue.
“We know that in the period when IHT has to be paid, before probate can be granted, families are often under financial strain. Increasing those costs will certainly have an impact on them.”
The Office for Budget Responsibility (OBR) estimates that an additional 1.5% of total UK deaths will become liable to pay IHT. That represents around 10,500 out of 213,000 estates with inheritable pension wealth in 2027 to 2028.
Some 38,500 estates will pay on average £34,000 in additional IHT because pension assets will be included in the value of the estate. In some cases, this will mean they are subject to inheritance tax of up to 40%.
One of the main motivations for including pensions in IHT is the potential to raise additional revenue. The Office for Budget Responsibility (OBR) has projected that IHT will generate £7.6 billion by 2028–29 under current rules. Including pensions could significantly boost this figure, particularly as pension wealth has grown in recent decades.
The UK’s shift from defined benefit to defined contribution schemes has placed more responsibility on individuals to accumulate substantial retirement savings, with many holding large pension pots that currently escape IHT.
However, any additional revenue must be weighed against behavioural changes. High-net-worth individuals may respond by increasing pension withdrawals to reduce the taxable estate, or by shifting wealth into other tax-efficient methods, such as trusts or business assets that qualify for relief. Such responses could undermine the effectiveness of the reform and create further complexity in the tax system.
Furthermore, adding pensions into IHT could dramatically alter retirement and estate planning strategies. Recent media reports suggest that wealthy pensioners are withdrawing sizeable sums from their pensions to spend on family holidays and gifts to their children, triggered by the Chancellor’s plans.
This could lead to accelerated depletion of retirement savings, increasing pressure on state benefits and social care systems in later life.
In the future, pension schemes might evolve to offer new options for reducing IHT exposure, potentially leading to greater complexity and administrative burden for both savers and HMRC.
Pension pots are primarily intended to fund retirement, not to serve as inheritance tools. Including them in IHT could penalise those who have saved for retirement, especially those who die relatively early without having accessed their pensions.
Enders adds: “The IHT rule change will transform the way some savers think about their pensions and funding retirement. Many retirees, and especially those close to and above age 75, may revise what to do with their pension pots and that will probably lead to more pension savings being drawn down.
“Adding pension pots into the scope of Inheritance Tax in the UK represents a significant policy shift with far-reaching implications. While it may enhance fairness and boost tax revenue, it could also encourage unintended behavioural changes, distort retirement planning and diminish incentives to save for old age.
“At the Estate Registry we encourage people to plan for their pension and estate management. It would be concerning if the consequences of including pensions in IHT were to bring about a long-term change in that pattern.”