As Rachel Reeves steps down as Chancellor, she confirms a significant tax change affecting thousands of households. Starting 6 April 2027, unused pension funds—money you have not withdrawn from your pension—will generally be included in the value of your estate for Inheritance Tax (IHT) purposes. This move targets retirees who preserve their pensions as legacy assets rather than using them for retirement income.
The Labour government is addressing concerns that generous tax reliefs on pension contributions and tax-free growth have encouraged people to hold onto pension funds, reducing immediate tax revenues. By including these unused pension funds in the IHT calculation, the government aims to close this loophole.
Under the new rules, unused pension funds could face a 40% tax rate on death if the total estate value exceeds the available IHT allowances. Funds passed to a spouse or civil partner remain exempt, so the major impact will occur upon the death of the second partner.
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The government estimates that out of around 213,000 estates with inheritabIe pension wealth in 2027–2028, approximately 10,500 will face new IHT liabilities, with an additional 38,500 paying higher IHT than before. The average increase in IHT liability is expected to be around £34,000 when pension assets are included.
These figures are based on static projections and do not account for possible changes in behavior, such as increased tax planning or faster pension withdrawals, which could reduce the number of affected estates. Personal representatives, beneficiaries, and pension scheme administrators will be involved in managing these new tax responsibilities. Currently, about 75% of IHT400 tax forms are submitted by professional agents, with the remainder handled by non-professional representatives.