Pensions - Changes Ahead

Pensions – Changes Ahead

In the last couple of months we received draft legislation on the inheritance tax changes in respect of Business Property Relief from April 2026 and Pension from April 2027 – please click here to see our Blog that has more details. There is now also a date in the diary for the Autumn Statement which is on 26^th November 2025.

 What’s Changed and What’s Changing?

Here are the major changes to that have been announced or have already changed:

Area	What’s Changing	Why / Purpose
Inheritance Tax (IHT) treatment of pension pots	From 6 April 2027, most unused pension funds and death benefits will be treated as part of the deceased’s estate for IHT purposes. Pension scheme administrators (PSAs) will have to report and pay any relevant IHT on these unused funds.	The government wants to close what it sees as a loophole: pensions are currently outside the estate (i.e. not counted for IHT), which gives them favourable tax treatment for inheritance.
State Pension possibly exceeding Personal Allowance	The “new state pension” (for those entitled to it) is projected to exceed the personal tax allowance in 2027 because pension uprates (via the triple lock) plus a frozen tax allowance means that more of the pension income could become taxable.	This is partly a consequence of frozen income tax thresholds (Personal Allowance etc.) being held constant until 2028. So, the pension increase will push amounts above the allowance.
Personal Allowance & Basic Rate Limit Freeze	The Personal Allowance (currently £12,570) and Basic Rate Limit will remain fixed at their current levels through tax years 2026-27 and 2027-28. Thus, these thresholds are not increasing with inflation until at least April 2028.	It is a fiscal strategy, often called “fiscal drag”: by freezing allowances, more of people’s income becomes taxable over time even if nominal incomes do not climb much.
Annual Allowance/ Tapered Annual Allowance/MPAA	These have not been changed — the Annual Allowance is still £60,000 for most savers, with tapering for higher earners; the MPAA (Money Purchase Annual Allowance) is higher than older thresholds.	These rules were updated in previous years, they affect how much one can contribute to pension schemes without incurring a tax charge.
Lifetime Allowance (LTA) abolished already	The LTA (a cap on the total pension savings on which tax relief can be claimed without penalty) was abolished from April 2024. So, this is already a settled issue.	Some savers were disincentivised to invest in a pension and this was impacting public services, particularly the NHS. By taking away the tax charge on funds above £1,073,100 the government hope a change in behaviour would keep people above pension access age in work for longer.
Pension Commencement Lump Sum (PCLS) – ‘Tax Free Cash’ - capped already	Although the Lifetime Allowance was abolished from 6th April 2024, a cap on the amount of tax-free cash was placed at £268,275 for most pension savers.	The ’compromise’ to removing the lifetime allowance was to cap the level of tax-free cash a member can take. The cap is 25% of the former lifetime allowance.

What are the Implications of some of these changes

• More pension income may be taxable: If the state pension exceeds the personal allowance, some of it will be subject to income tax. Even if it is only a small amount, this changes take-home income and impacts the net position of pensions in payment or as they are drawn.
• IHT on pension pots: The change from April 2027 means that unused pension funds (including, in many cases, SIPPs etc.) will now contribute to the value of your estate. Thus, beneficiaries may face inheritance tax if the combined estate exceeds the nil-rate band (£325,000, or more with allowances).
• Liquidity of Pension Assets to pay IHT: HMRC expect IHT to be settled within 6 months of any death and charge interest on unpaid amounts after this date. Members of SIPPs or SSAS schemes, particularly those with commercial property, need to consider the consequences of a death and how the scheme may settle IHT without having to force sell the asset.
• The Residential Nil Rate Band: Where the value of your unspent pension when added to your estate is in excess of £2m you may suffer a loss of this £175,000 allowance as tapering reduces it by £1 for every £2 over £2m.
• Double taxation risk: For a deceased over 75, there is a possibility that beneficiaries will face both IHT and income tax when they withdraw.
• Estate planning becomes more complex: What you leave in pensions, and how / when you draw them, will need more careful consideration. Also, reporting and administrative requirements will change since pension schemes will become more involved.

 How can A J Hird help?

Review your pension savings structure

• How much of your pension is unspent and might be subject to IHT under the new rules?
• Consider whether you want to draw down more during your lifetime vs leaving large untouched pots.

Estate planning

• Revisit your Will and consider what you want your pension legacy to look like.
• Think about using trusts, or other estate-planning vehicles to reduce IHT risk.
• Transfers between spouses/civil partners are generally still exempt, so structuring ownership and timing around this might help.

Consider tax efficiency of withdrawals

• If you anticipate that part of your pension will be above the personal allowance (or state pension will exceed it), plan withdrawals in a way to smooth tax exposure.
• Possibly use ISAs or other savings vehicles where withdrawals will not trigger additional tax or IHT, depending on your broader financial situation.

Keep an eye on thresholds

• Since tax allowances (Personal Allowance, Basic Rate Limit etc.) are frozen until 2028, incremental income increases (from pensions, investments, etc.) may push you into higher tax bands. Estimate your income in future years to see if that applies.

Adjust retirement plans if needed

• If you were planning to leave a large pension pot untouched for inheritance, you may wish to adjust that plan.
• Also reassess expected retirement income: do you need extra income earlier, or can you afford to draw more now to reduce IHT later?

Be proactive rather than reactive

• Many people will only notice when these changes take effect — earlier planning gives you more options.

 With the Budget date now set, we are aware this provides even more time for speculation and rumour across the media. Our stance remains we can only provide advice based on current or confirmed legislation. Whilst there is not much anyone can do to change the course of events set by the Chancellor on 26^th November, it is always possible to react to them in a constructive manner.

We will provide a comprehensive summary report of the Budget when it is announced at the end of November.