Pension and IHT Changes 2025: What You Need to Know

Significant changes to pensions and inheritance tax (IHT) in the UK are set to take effect in 2025 and beyond, impacting how individuals save for retirement and pass on wealth.

Understanding these reforms is essential to protect your assets and ensure your loved ones benefit as intended.

Pensions to Be Subject to Inheritance Tax from 2027

From April 6, 2027, the Pension and IHT Changes 2025 will mean unused pension pots will be considered part of your estate for IHT purposes. Families could previously pass on most defined-contribution pensions largely tax-free, as they were exempt from IHT

Tom Selby, head of retirement policy at AJ Bell: “This is a dramatic U-turn from the government’s previous position that pensions should be used as an estate planning tool.

People who’ve been carefully building pension pots to pass down to their families could now be hit with a significant tax bill.”

As a result, individuals with substantial pension savings could see up to 40% of their remaining pot lost to tax if their estate exceeds the IHT threshold. Early planning and strategic withdrawals may now be advisable.

Pension Scheme Consolidation: Megafunds on the Horizon

In addition, the government is now actively moving forward with its broader pension consolidation strategy.

Pension and IHT Changes 2025 means Smaller schemes will be merged into large “megafunds,” each managing £25 billion or more.

These larger schemes aim to deliver more substantial investment returns and lower management costs.

Chancellor Rachel Reeves: “Consolidating pensions into fewer, bigger schemes means better returns for savers and more investment in UK growth.”

For savers, this could mean larger pension pots over the long term, with estimates suggesting average boosts of around £6,000, but it also means changes in how funds are managed and where they are invested.

Read about IHT receipts reaching new highs

Changes to Inheritance Tax Relief on Farms and Businesses

Another key update is the cap on Agricultural Property Relief (APR) and Business Property Relief (BPR). From April 2026, there will be a combined £1 million cap for 100% relief. Any value above that threshold will receive only 50% relief, increasing the effective IHT rate to 20%.

CLA (Country Land and Business Association): “This could force families to break up farms and businesses just to pay tax bills. It’s a deeply worrying move for rural communities.”

How You Can Prepare for Pension and IHT Changes 2025

  • Draw down pensions strategically to reduce their IHT exposure.
  • Use trusts and lifetime gifting to reduce the value of your estate.
  • Set up life insurance to be held in trust to cover IHT bills.
  • Make charitable donations to lower your estate’s taxable value.

We’re Here to Help

As an independent financial adviser, we specialise in helping individuals and families navigate complex changes like these.

Whether you’re reviewing the Pension and IHT Changes 2025, considering your inheritance plans, or aiming to protect your estate, we’re here to guide you every step of the way and help you make informed, tax-efficient decisions.

Let’s ensure your financial legacy is passed on as you intend.

Contact us today for a no-obligation consultation tailored to your needs.