UK pensions face rising tax pressure from allowance freezes and IHT reforms

UK pensioners and families face significant tax implications due to upcoming changes to inheritance tax (IHT) and the freezing of the Personal Allowance. A House of Commons Library report highlights that as the State Pension rises under the triple lock while the Personal Allowance remains frozen at £12,570 until 2031, an increasing number of retirees may become liable for income tax.

Furthermore, analysts at NFU Mutual warn of a ‘triple tax blow’ starting in April 2027, when unspent pension pots will be included in IHT calculations. For some families, particularly in Scotland where different income tax rates apply, the effective tax rate on inherited pensions could reach as high as 93 per cent. This occurs when IHT is applied to the pension, combined with the potential loss of residence nil-rate bands for larger estates and income tax charges for beneficiaries of those who die after age 75.

In response to these looming reforms, financial advisers are increasing demand for pension IHT bonds. Data from Defaqto shows that providers like Prudential remain highly recommended as advisers seek to assist clients with estate planning ahead of the 2027 deadline.