Inheritance tax and pensions – what’s changed since the 2024 Autumn Budget?

This content was reviewed and approved by Tamlin Russell.

Inheritance Tax changes were among the key highlights of the 2024 Autumn Budget delivered by Chancellor Rachel Reeves.

We examine what these changes mean for consumers, their effect on people’s retirement plans, and why seeking professional guidance can help you financially prepare for the future.

The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.

How have inheritance tax rules changed?

Labour’s first Budget since returning to power saw Rachel Reeves announce a two-year extension to the inheritance tax (IHT) threshold. This freezes IHT until 2031, and more people will likely end up paying it.

So where do consumers now stand with IHT?

• First £325,000 of your estate (property, assets, investments, savings) remains in the nil rate band so you won’t pay IHT. Above that, unless you’re a spouse or civil partner, you’ll pay the standard 40% rate of IHT.

• An additional residence nil rate band up to £175,000 remains if your assets included the family home you’re leaving to children, grandchildren, or named beneficiaries. In other words, you can pass on a property you owned up to this value and pay no IHT.

• Inherited pensions – pension funds that are unused and death benefits payable from a pension will be added to the IHT limit under the latest reforms from April 2027. At the moment, most pensions are not subject to IHT at any age. This means that if you die before the age of 75 your pension can be passed to your beneficiaries tax-free. If you’re over 75 when you pass away, there may not be any inheritance tax to pay, but pensions are taxed at your beneficiaries’ income tax rate.

Gwen Haggo, Savings and Retirement Sales Director at LV=, believes the changes to inheritance tax are likely to affect “a small but growing number of estates” that was once “only an issue for the very wealthy.”

She added: “Including pensions as part of an individual’s estate will contribute to more people paying 40% inheritance tax on anything above the nil rate band of £325,000.”

Haggo also suggested more people are likely to explore alternative ways of planning for inheritance tax such as investing in life insurance trusts or smoothed bonds.

“Carefully made financial plans using pensions as an IHT shelter will need to be reviewed,” she concluded.

What does this mean for you?

If you’re concerned about the effects inheritance tax changes may have on your retirement plans, it’s important to seek financial advice to explore the options open to you.

According to our research, only 49% of UK working adults are confident they’ll have enough money in their pension pot when they retire. That means most non-retired people display a lack of confidence in their retirement plans and don’t know how much money they have saved in their pension.

It is wise to have a clear idea of how much money you’ll need to save to fund the lifestyle you want in retirement. Our financial advisers at LV= can help you work out a pension plan that aligns with your personal needs. Similarly, you can work out how much pension income you will need to help you plan for retirement.

What do these changes to inheritance tax mean for consumers and pension holders?

More people will be required to pay inheritance tax because defined contribution pensions will be considered part of their estate under the new proposed legislation.

As a result, people may think about revisiting their retirement plans and adjusting their finances.

This could see an increase in the number of people gifting money to their children and loved ones when they’re alive to use for a property purchase or other significant expenses.

Another scenario could mean a rise in people using their pensions early as a form of retirement income instead of leaving them untouched until later in life. Doing this could ensure someone else’s estate stays below the IHT threshold.

The changes could also lead to higher take-up of annuities that provide a guaranteed income while keeping your estate below IHT limits.

However, changes to IHT are unlikely to affect those with defined benefit pensions, also known as final salary schemes.

Should you seek financial advice?

Our research shows that 59% of people who contact a financial adviser feel confident they have enough pension money saved for retirement. Financial advice could not only prepare you for life when you retire, but it can also ensure you’re taking money from your pension pot in the most tax-efficient way.

Seeking professional financial advice will provide you with the choices available and help you decide what to do with your pension fund so that you get the most out of your savings and have enough money to fund your lifestyle.

Because financial advisers are regulated by the Financial Conduct Authority, they provide impartial advice and offer a personal recommendation for products and services that match your needs and retirement goals.

As well as helping you make the right pension decisions, financial advice offers the added security of knowing you’ll be protected from the costs of fraud and scams.

Is financial advice expensive?

Financial advisers are trained, professional experts and don’t provide a free service, just like solicitors. As they work on your behalf, you’ll be charged for their advice and services. When you pay for pension advice you buy the expertise of those people best placed to take you through the retirement planning process. This means you are most likely to get the best outcome and best plan for your retirement. An adviser will also look at the most tax efficient way for you to take money from your pension. Paying less tax will mean you’re better-off.

How much is charged for the service you receive will depend on what it is you want to do and your individual circumstances. Any charges will be made clear to you from the very outset before they start, so you know exactly how much you’re paying and what you’ll receive in return.

What other pension advice is available?

Not everyone wants or needs advice. You’ll find there are guidance and non-advised services available to give you support putting your own plans in place, particularly if you’re looking to purchase a lifetime annuity.

If you’re close to retirement and ready to explore your options, the UK Government’s free Pension Wise service is a useful resource. It offers impartial pension advice and guidance, whether online, in person, or over the phone.

Whatever you decide, it’s important to ensure you’ve made the right choices as some decisions are irreversible. Regulated financial advice can help you get maximum value from your pension savings in a tax-efficient way and enable you to enter retirement with full confidence.

Do you need help with retirement planning?

If you’re rethinking your retirement plans, speak with one of our financial advisers and receive professional, tailored advice regarding the options open to you. You’ll receive jargon-free, unbiased information to help you understand your retirement choices.

Financial advisers can also assist with the preparation of your pension plan and organise your investments and savings, so you’re set up for retirement.

Whether you’re seeking advice on pensions or alternative options such as annuities, advisers can help you get the most out of your retirement products and highlight any potential risks.

The initial consultation with an LV= financial adviser is without obligation. For most retirement advice, you’ll only be required to pay a fee once you’ve chosen to proceed with our recommendations.

If you are affected by changes to inheritance tax rules, request a call back to speak to one of our advisers today.

Data Source

LV= surveyed 4,000 nationally representative UK adults via an online omnibus conducted by Opinium in December 2024. 

View the December 2024 Edition of the LV= Wealth and Wellbeing report