Pensions and Inheritance Tax: Navigating the 2024 Autumn Budget changes

The 2024 Autumn Budget introduced proposed reforms that may significantly impact pensions and their role in estate planning. From April 2027, unused pension funds could be included within the taxable estate for Inheritance Tax (IHT) purposes, changing how families plan for wealth transfer. However, these changes are not yet set in law.

A technical consultation on the proposals was launched by HMRC and closed on 22 January 2025. We now await the government’s response before legislation is finalised. In this article, we explore what’s currently known and how individuals and professionals can prepare for potential changes.

Pensions and Inheritance Tax: The 2024 Autumn Budget proposals

Inclusion of unused pensions in IHT

Under the current system, pension pots can often be passed to beneficiaries free from Inheritance Tax, especially if the pension holder dies before the age of 75. The proposed reforms would treat unused pension funds as part of the deceased’s estate for IHT purposes from April 2027.

This potential change is intended to discourage the use of pensions primarily as inheritance vehicles rather than for retirement income.

HMRC consultation and next steps

In response to the Autumn Budget, HMRC launched a technical consultation on Inheritance Tax liability, reporting, and payment for pensions. This consultation closed on 22 January 2025, and a formal government response is awaited.

Read the consultation in full here: Inheritance Tax on pensions: liability, reporting and payment – GOV.UK

Until the consultation response and subsequent legislation are published, the exact application and administration of these changes remain speculative.

Administrative implications (if implemented)

Under the proposed changes, pension scheme administrators would be required to report the value of death benefits to the Personal Representatives and potentially settle IHT directly from the scheme. This could reduce the value of benefits paid to loved ones and introduce new complexities into the estate administration process.

Estate professionals should be aware that these rules, if enacted, would alter both timeframes and responsibilities in the probate process.

Impact on estate planning strategies

While we await the final response, it’s wise for individuals to begin reviewing their financial plans in light of potential changes. Some key considerations may include:

• Accessing pensions earlier to reduce the value potentially caught by IHT;

• Lifetime gifting of other assets, where appropriate, to reduce the estate;

• Use of Trusts to manage wealth and control distribution, though this can have tax implications of its own.

In all cases, a coordinated strategy with legal and financial professionals is key to adapting successfully.

What the pension changes could mean for Will Writers and Financial Advisers

For professionals, these proposed changes signal a need to re-evaluate how pensions are discussed in estate and financial planning.

Will Writers

• May need to consider pensions more actively in estate planning discussions;

• Should prompt clients to update their Wills and pension nominations in light of estate value changes;

• Can play a crucial role in raising awareness of how IHT changes may affect beneficiaries.

Financial Advisers

• Should prepare clients for the possibility of pensions becoming less IHT-efficient;

• May explore alternative tax-efficient savings and investment vehicles;

• Can lead conversations about drawing down pensions earlier or redistributing assets.

Ongoing collaboration between Will Writers and Financial Advisers will be essential in providing joined-up advice as more guidance emerges.

Conclusions

While the 2024 Autumn Budget outlined proposed changes to how pensions are taxed on death, the final details are not yet confirmed. The HMRC consultation closed in January 2025, and we await the outcome.

In the meantime, individuals and advisers alike should remain alert to legislative developments and begin considering how these proposals might affect long-term plans.

For now, the key is proactive planning and professional guidance, ready to respond once the government clarifies the future direction of Inheritance Tax and pensions.

Kings Court Trust is a probate and estate administration provider that offers award-winning solutions to support every family.

Whether you need a hand obtaining the Grant of Representation, completing the complicated tax and legal work, or anything in between, you’re in safe hands with our team of specialists.

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