Changes to Inheritance Tax on Pensions in The Spring Statement 2025
- MAZ
- Apr 5
- 15 min read
The Audio Summary of the Key Points of the Article:
The Updated Pension & Inheritance Tax Landscape in the UK — What Changed After the Spring Statement
The Spring Statement 2025 delivered some much-anticipated updates for pensions and inheritance tax (IHT) planning in the UK — and it’s got everyone talking.
If you’re a UK taxpayer wondering how these changes affect your estate, your children’s financial future, or your retirement planning, you're in the right place.
Let’s break it all down. No jargon. No fluff. Just clear facts, expert insights, and what you actually need to know — backed by real numbers as of March 2025.
First, a Refresher – Was My Pension Ever Subject to Inheritance Tax?
Traditionally, pensions have been one of the most tax-efficient ways to pass on wealth, especially defined contribution (DC) pensions like SIPPs.
Before the Spring Budget 2025:
If you died before age 75, beneficiaries could usually inherit your pension tax-free.
If you died after 75, beneficiaries paid income tax at their marginal rate on withdrawals — but no inheritance tax (IHT) was due.
The pension pot, unlike most other assets, didn’t count towards your estate for IHT purposes. But that’s what’s now changing.
So, What Changed in the Spring Statement?
Here’s the short version: The inheritance tax-exempt status of pensions is being scaled back.
In the March 2025 Spring Statement, the government announced the following key updates:
Change | Old Rule (Pre-March 2025) | New Rule (Post-March 2025) |
Death Before Age 75 – Pension Pot | Passed to beneficiaries 100% tax-free | Now counts towards the estate for IHT purposes |
Death After Age 75 – Pension Pot | Subject to income tax only, no IHT | Still subject to income tax, plus IHT for amounts exceeding the nil-rate band |
Lump Sum Payments | Tax-free under 75 | Now subject to IHT above thresholds |
IHT Threshold | £325,000 nil-rate band, £175,000 residence nil-rate band | No changes announced in thresholds – frozen until 2028 |
In a nutshell: If you're leaving behind a large pension pot, your heirs may now be facing an IHT charge, especially if you're under 75 when you pass.
Real-Life Example — What This Means
Meet Sarah. She's 68, has a £900,000 SIPP and no other major estate. Previously, had she passed away before 75, her son could have received the full amount tax-free.
But now, under the new rules:
Her pension pot is added to her estate value.
Total estate: £900,000.
Less nil-rate band: £325,000.
Her son pays 40% IHT on £575,000 = £230,000.
That’s a huge shift.
The Government’s Justification
The Treasury argues this change:
“Improves fairness” by aligning pensions with other forms of wealth.
Targets wealthier estates who use pensions for IHT avoidance, not income.
Helps plug the £12bn+ annual shortfall in pension-related tax leakage.
But critics call it a stealth tax grab.
Other Stats You Should Know
Here’s what we’re working with right now:
Total IHT collected in 2024-25: £7.9 billion (up from £7.1bn in 2023–24)
Number of pension pots passed on in death under 75: ~60,000 per year
Average UK pension pot (at 65): £107,300 (but higher among professionals/business owners)
Tax-free pension lump sum cap: Still at 25%, but review ongoing
H3: Are All Pension Types Affected?
Here’s where it gets a bit nuanced.
Pension Type | IHT Changes Apply? |
Defined Contribution (SIPP, personal pensions) | ✅ Yes |
Defined Benefit (Final salary schemes) | ❌ Not directly – benefits usually stop at death |
State Pension | ❌ Not inheritable in this way |
Annuities with guaranteed periods | ✅ IHT applies to lump sum if payable to estate |
Strategies That Are Now Less Effective
In light of the changes, common “loopholes” are being closed:
Using pensions as tax-free inheritance tools? That ship has sailed.
Delaying pension drawdown in retirement to reduce estate size? No longer optimal if it creates a large untouched pot.
Keeping wealth in pensions vs ISAs? Pensions now come with IHT baggage.
What Tax Planners Are Saying
Accountants and IFA forums across the UK are buzzing with reactions. A few quotes from professionals on LinkedIn and finance roundtables:
“This is going to hit high net worth retirees the hardest. Pensions were the last big untaxed asset — and now they’re not.”
“The change forces a rethink in estate planning strategies, especially for business owners and self-employed professionals.”
“Hold On, Does This Mean My Kids Get Less?”
In many cases — yes, unless you take action. Your children or chosen beneficiaries could now lose 40% of your pension pot to IHT unless proper planning is in place.
But don’t panic — we’ve got more solutions and guidance coming up in Part 2 and Part 3 of this article.
UK Inheritance Tax: 5-Year Analysis & Data (2019-2024)
UK Inheritance Tax on Pensions: 5-Year Analysis & Trends (2020-2025)
Inheritance Tax Planning Strategies After the 2025 Pension Rule Changes
Now that we know the government’s got its eye on our pensions for inheritance tax (IHT), it’s time to talk strategy. Because, let’s face it — nobody wants HMRC getting a bigger slice of their hard-earned retirement pot than absolutely necessary.
This section is all about solutions: smart, legal, and effective ways to minimise the IHT burden on your pension after the Spring Statement changes. We’ll walk through what works now, what doesn’t, and what actions to take — whether you're an individual saver or a business owner.
Recap — Why You Need New Estate Planning Tactics
Prior to the latest update, pensions were a stealthy way to avoid inheritance tax — especially for those with large Self-Invested Personal Pensions (SIPPs).
But with the Chancellor’s latest changes:
DC pension pots now form part of your estate upon death, even if you die before 75.
This makes them liable for 40% IHT above the nil-rate threshold (£325,000).
The frozen thresholds until 2028 mean more people are dragged into the IHT net due to inflation and asset growth.
So what can you do?
Strategy 1 – Draw Down Your Pension Earlier (But Smartly)
If you're in your 60s or 70s and not touching your pension because you "don’t need it yet" — you might be handing HMRC a gift when you die.
Instead, consider:
Withdrawing income or lump sums earlier, even if you don’t strictly need the cash.
Invest that money in IHT-efficient vehicles like ISAs, gifting it away (see below), or spending it!
Real-life example:
Malcolm, 70, has £600,000 in his pension and £100,000 in other savings. He delays pension drawdown to avoid income tax. But when he dies at 74, his entire pension is added to his estate and faces a £110,000 IHT bill. Had he withdrawn £300k and gifted it, he could have reduced the tax bill by over half.
Strategy 2 – Gift Regularly & Strategically
The old-school “give it away while you’re alive” tactic still works — and it’s more important than ever now.
Here’s a quick refresher on HMRC gifting rules:
Gift Type | Annual Allowance | IHT Exempt? |
Annual gift allowance | £3,000 per tax year | ✅ Yes |
Small gifts | Up to £250 per person | ✅ Yes |
Wedding gifts | £5,000 (child), £2,500 (grandchild) | ✅ Yes |
Regular gifts from surplus income | Unlimited (if habitual) | ✅ Yes (must not affect lifestyle) |
So if you’re in the “draw it down early” camp, consider gifting part of your pension withdrawals annually. You can even set up a standing order to your children or grandchildren and make it a habitual gift, which is totally exempt from IHT.
Strategy 3 – ISAs vs Pensions: Time to Rebalance?
There’s long been a debate between maxing out pensions or ISAs. In the post-2025 world, the pendulum may be swinging slightly towards ISAs.
Why?
ISAs are free from income tax and capital gains tax, but they do form part of your estate for IHT.
However, unlike pensions, you have control over how and when you transfer ISA wealth, such as by gifting gradually during your lifetime.
So, if your pension pot is growing large (say £600k+), consider rebalancing — draw down your pension to fund your ISA, and later gift from the ISA.
Strategy 4 – Use a Trust (Carefully)
Pensions can’t usually be placed inside a trust — but the death benefits can be directed to a trust via your expression of wishes form.
Pros:
Helps control how funds are distributed after death.
Can limit the size of the beneficiary’s estate (especially useful if they’re also wealthy).
Cons:
Complex tax implications for trusts.
Not IHT-free — relevant property trust charges may apply.
Speak to a financial planner with pensions and trust experience if you want to explore this route.
Strategy 5 – Pension Life Insurance Wrap
Here’s a newer workaround that’s gaining popularity post-2025:
Take out a life insurance policy, placed in a discretionary trust, specifically to cover the IHT liability on your pension.
Fund this with part of your annual pension drawdown.
When you die, the insurance pays out tax-free, and your heirs can use that to pay the IHT.
This keeps your estate intact while handling the tax bill outside of probate.
Strategy 6 – Review Your Expression of Wishes Form
This is huge.
Many people filled out their expression of wishes forms (which tells your pension provider who gets your pension) years ago and then forgot about them.
Post-2025, that form is critical because:
Leaving your pension to your estate makes it liable for full IHT.
But if you nominate individual beneficiaries, your pension provider can bypass your estate, and apply different tax treatment.
Double-check this with your provider. It could literally save your family hundreds of thousands.
Business Owners — Listen Up
If you're a business owner in the UK, these changes hit extra hard.
Most directors and entrepreneurs:
Use pension contributions as a tax-efficient way to extract profits from their business.
Delay drawing down to let the pot grow, often for IHT purposes.
That playbook needs to change now. Here’s what you should consider:
Pension Pot & Business Relief No Longer Mix Well
Pensions don’t qualify for Business Relief — so if your pension pot grows larger than your business’s exempt assets, your estate could now face significant IHT liability.
Consider Diversifying Exit Strategy
Instead of loading all your post-exit funds into pensions:
Use Enterprise Investment Scheme (EIS) or Business Property Relief (BPR)-eligible investments.
Invest in IHT-exempt AIM shares if you can stomach the risk.
What Your Financial Adviser Should Be Doing Right Now
If your financial adviser hasn’t already called you about this — maybe call them first.
Here’s what you should be reviewing:
Your expression of wishes.
Pension drawdown timing strategy.
Use of ISA vs pension wealth.
Potential for trust structures or life insurance policies.
Any gifting opportunities based on surplus income.
Let’s Be Honest – Who’s Really Affected?
These changes aren’t going to bother:
People with small or average pension pots (under £300k).
Retirees who fully draw down their pensions before death.
Individuals who already rely on their pension for income.
But if you're:
Sitting on a £500k+ SIPP, AND
You’re not planning to touch it, AND
You want to pass that money to your kids tax-free...
Practical Pension Planning for Every Stage of Life After Inheritance Tax Changes
In this final part of our in-depth guide, we’re getting laser-focused on real-life pension planning strategies for different age groups and life stages — post the Spring Statement changes to Inheritance Tax (IHT) on pensions.
Whether you’re:
In your 30s and saving hard,
Mid-career and balancing ISA/pension contributions, or
Retired with a growing SIPP pot…
There’s a tailored action plan for you here. Let’s futureproof your pension strategy — with the goal of passing on more, and losing less to tax.
Planning for Young & Mid-Career Professionals (Ages 25–50)
So you’re in the growth phase — maybe you’ve got a workplace pension, a SIPP on the side, or you're self-employed and juggling it all.
You’ve got time on your side, and that’s your biggest asset. Here’s how to leverage it.
Keep Contributing to Pensions — But Rebalance with ISAs
Pensions still offer unbeatable upfront tax relief — 20% automatically, and up to 45% for high earners.
✅ Keep contributing. But now consider a 70/30 or 60/40 pension/ISA split.
Account | Contribution Limit (2024/25) | Key Benefit |
Workplace Pension | Depends on earnings | Tax relief + employer match |
SIPP | Up to £60,000/year | Full tax relief |
ISA | £20,000/year | Tax-free withdrawals (but forms part of estate) |
Tip: Think of ISAs as your inheritance pot, and pensions as your income pot. It helps with future flexibility.
Nominate Beneficiaries Now
Even if your pension pot is small today — sort your expression of wishes form.
This avoids your pension defaulting to your estate (which triggers IHT). Set reminders to review it every 5 years or after major life changes (marriage, kids, divorce).
Planning for Late-Career Professionals (Ages 50–65)
At this stage, your pension pot could be growing fast — and you might even be approaching lifetime allowance (LTA) territory (though it's been abolished).
Here’s how to optimise.
Know Your IHT Exposure Early
Use an online estate calculator (like Gov.uk’s estate checker) or work with an IFA to calculate:
Estimated value of your estate at retirement
Likely IHT bill for your heirs under current rules
Then start acting on it — don’t wait until you’re 70.
Consider Partial Drawdown + Reinvest Strategy
Rather than leave your pension untouched:
Draw down regular amounts, stay within your personal allowance or basic rate band, and reinvest in:
Lifetime ISAs (if under 40)
Stocks & Shares ISAs
Gifting into Junior ISAs (for grandkids)
This chips away at your pension while moving money into more IHT-efficient spaces.
Retirees (Ages 65+): Rethink the Old “Leave It Alone” Model
If you’re retired with a healthy pension and low living expenses, you may be following the classic advice: “Don’t touch your pension if you don’t need it.”
Post-2025, that could be a mistake.
Your Pension is Now a Tax Time Bomb
Let’s say you’re 70, and your £800k SIPP is growing 5% annually. If you live to 85:
That pot could hit £1.7 million.
Your heirs might lose £500,000+ to IHT and income tax combined.
🔥 Solution: Start de-risking your estate now.
Use the ‘Pension to Gifting’ Pipeline:
Draw £20k–40k annually from your pension (stay within tax-efficient bands).
Gift some directly to children or grandchildren (see allowances in Part 2).
Use the rest to pay premiums on a life insurance in trust that covers future IHT.
Reassess Your Death Benefit Nomination Strategy
Should your pension go to your spouse, children, or a trust?
What’s the IHT exposure for each recipient?
Would they benefit more from drawdown rights or a lump sum?
Many pension providers now let you nominate more than one beneficiary, and choose how much each gets. Time to log into your pension dashboard and take action.
Top Tools & Resources Every Taxpayer Should Use
Here are live and reliable tools to help you navigate the post-2025 landscape:
Tool | Link | Use |
HMRC IHT Calculator | Estimate your estate’s IHT bill | |
Pension Death Benefit Nomination Form | Check with your provider | Nominate beneficiaries properly |
Trusts & IHT Guidance | Understand how trusts can help | |
Gifting Rules & Limits | Use exemptions wisely | |
Financial Adviser Search | Find a pension/IHT expert |
What If You’ve Already Passed on Pension Wealth?
If someone has already died, and their pension was passed on before the new rules took effect, the old rules still apply.
This means:
Death before age 75 = tax-free inheritance, no IHT.
Death after age 75 = income tax applies, but no IHT.
The new IHT rules apply only to deaths occurring after April 2025.
Multi-Generational Planning — Don’t Just Think About Your Estate
A growing trend among wealthier families is to plan across three generations:
Grandparents use pensions to support adult children AND help fund Junior ISAs for grandkids.
Adult children receive lump-sum gifts, set up family trusts, and plan their own estate to reduce compounding tax.
If you’re sitting on significant pension wealth, involve the family. One smart move now can save three generations of tax.
Final Planning Checklist for UK Taxpayers
Before we wrap this up, here’s your post-2025 pension IHT planning checklist:
✅ Review your pension beneficiary nominations
✅ Check your estate value and projected IHT liability
✅ Consider partial pension drawdown
✅ Start gifting from surplus income or pension withdrawals
✅ Talk to a financial planner about trusts, life insurance, or investing IHT-free
✅ Avoid passing pensions to your estate – direct to beneficiaries is better
✅ Rebalance between ISAs and pensions for long-term flexibility
Summary of All the Most Important Points Mentioned In the Above Article
Pensions inherited after death before age 75 are now included in the deceased’s estate and may be subject to 40% inheritance tax (IHT).
The nil-rate band (£325,000) and residence nil-rate band (£175,000) for IHT remain frozen until 2028, increasing tax exposure due to inflation.
Pension pots passed on after age 75 are now potentially subject to both income tax and IHT, depending on the estate’s value.
Defined contribution pensions like SIPPs are impacted by the changes, while state pensions and most defined benefit pensions are not.
Failing to update your pension’s expression of wishes form can unintentionally expose your pension to full IHT.
Drawing down your pension earlier and gifting strategically during your lifetime can significantly reduce IHT liability.
Using ISAs alongside pensions offers more inheritance flexibility, even though ISAs are also included in the estate for IHT.
Life insurance in trust is now a popular tool to offset expected pension-related IHT costs.
Business owners should rethink using pensions solely for tax-efficient profit extraction due to increased IHT implications.
Estate planning strategies must now consider family-wide, multi-generational approaches to minimise tax across generations.
FAQs
Q1. What happens if your pension provider pays the death benefits directly to your estate after you die?
A. If the pension death benefits are paid into your estate rather than directly to nominated beneficiaries, the entire amount will be considered part of your estate and may be subject to inheritance tax (IHT) at 40% above the nil-rate band.
Q2. Can your pension be subject to double taxation — both income tax and inheritance tax — after the 2025 changes?
A. Yes, under the new rules, if you die after age 75 and leave a large pension, your beneficiaries could face both income tax on withdrawals and IHT on the value added to the estate.
Q3. Is there a deadline for updating your pension nomination to avoid inheritance tax?
A. While there is no official deadline, it is crucial to update your nomination as soon as possible, especially after major life changes, to ensure your pension is paid directly to beneficiaries and not through your estate.
Q4. Will inherited pensions from a spouse still be exempt from inheritance tax?
A. No automatic exemption applies; pensions passed to a spouse now may still be assessed as part of the estate for IHT unless structured correctly through nomination and provider policy.
Q5. Are children taxed differently than spouses when inheriting a pension under the new rules?
A. Yes, children may face a higher IHT burden than spouses since spouses can often receive pensions or drawdown without immediate tax implications, whereas children’s inherited pensions are taxed more strictly.
Q6. Do the new inheritance tax rules apply to annuities purchased with pension funds?
A. Yes, if the annuity includes a guaranteed payment period or lump sum death benefit, that value may now be included in the deceased’s estate for IHT calculation.
Q7. Can you transfer your pension overseas to avoid UK inheritance tax?
A. Transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS) may offer IHT advantages, but this is complex and must be evaluated under current HMRC anti-avoidance rules in effect as of March 2025.
Q8. Are drawdown pensions more tax-efficient than lump sum death benefits under the new rules?
A. Yes, in many cases, income drawdown options offer more flexibility and may reduce the immediate IHT exposure compared to lump sum payments, which are fully assessable under the new legislation.
Q9. Can you use your will to override a pension nomination after death?
A. No, pension nominations typically override wills unless the pension scheme pays into your estate, so it’s vital to align both your will and pension paperwork for consistency.
Q10. Is there an age at which inheritance tax on pensions becomes unavoidable under the new regime?
A. While there’s no specific age trigger, dying after 75 now almost always results in some combination of income tax and potential IHT unless pre-planning is done to reduce pension values or reroute them efficiently.
Q11. What’s the IHT impact if your pension is left to multiple beneficiaries under the new rules?
A. The total value of your pension will be apportioned among your estate beneficiaries and taxed accordingly; how it’s split doesn’t exempt any portion from tax unless it’s within allowances or uses specific planning tools.
Q12. Can pension assets be placed in a family trust during your lifetime to avoid IHT?
A. Not typically; pensions are held in trust by the provider, and you can't transfer them into a personal trust while alive, though you can direct death benefits to one after death.
Q13. Are defined benefit pensions also included in IHT calculations under the 2025 rules?
A. Generally no, but if the scheme offers lump-sum death benefits or death-in-service payments, those elements may be taxable under the new IHT rules.
Q14. Will the frozen IHT thresholds affect pensioners with modest pension pots?
A. Yes, as inflation and investment growth increase estate values, even modest pension pots may push total estate values over the IHT thresholds, making them liable over time.
Q15. Do the new rules affect pensions already in payment before the Spring Statement 2025?
A. Yes, even if you’ve started drawing from your pension, any remaining value on death is assessed for IHT under the new rules if passed on as part of your estate.
Q16. Is your lifetime ISA subject to the same inheritance tax rules as pensions?
A. No, LISAs are treated like other ISAs and form part of your estate, but do not benefit from the same nomination flexibility as pensions and are fully assessable for IHT.
Q17. Can you still use pension pots to bypass probate under the updated rules?
A. Yes, as long as the provider pays the pension directly to nominated beneficiaries, it avoids probate, although it may no longer avoid IHT as it once did.
Q18. Are lump-sum pension death benefits taxed immediately upon death or on distribution?
A. The IHT charge applies based on the estate valuation at death, not when the lump sum is paid, though income tax applies upon distribution if the recipient is liable.
Q19. What happens if no pension beneficiary is named under the new IHT regime?
A. The pension defaults to your estate and becomes fully taxable under inheritance tax rules, which could significantly increase the tax bill for your heirs.
Q20. Are pension pots now treated the same as property or investments for inheritance tax purposes?
A. Under the 2025 changes, defined contribution pension pots are now broadly treated like other estate assets for IHT purposes, losing their previously unique tax advantages.
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