For years, pensions have enjoyed a rather special status when it comes to inheritance planning.
In many cases, people could leave pension funds untouched, spend other assets first and pass their remaining pension benefits on to future generations without them forming part of their estate for Inheritance Tax purposes.
That position is changing.
Whilst the Autumn Budget 2026 introduced a new Pension Tax Allowance aimed at preventing some pensioners being dragged into paying Income Tax simply because State Pension increases push them above the Personal Allowance threshold, the much bigger conversation for many families is what happens to their pension when they're no longer around.
The pension tax allowance: sensible, but not the main story
The Budget introduced a new Pension Tax Allowance from April 2027.
The reason is fairly straightforward. From April 2027, the full new State Pension is expected to increase to £13,036.40 a year, whilst the Personal Allowance remains frozen at £12,570.
Without intervention, someone whose only income was the full new State Pension would find themselves paying a relatively small amount of Income Tax, around £93 a year, simply because the State Pension had increased above the tax-free allowance.
The new Pension Tax Allowance is designed to prevent that happening.
In simple terms:
- Pensioners with total income of up to £13,036.40 will receive the full allowance.
- Those with income between £13,037 and £13,319 may receive a partial allowance.
- Those with income above £13,319 will not receive any Pension Tax Allowance.
The allowance will be applied automatically by HMRC, so eligible individuals will not need to make a claim. The change is expected to remove Income Tax entirely for around 290,000 pensioners, with around 500,000 people benefiting from some level of tax reduction in 2027/28.
For many pensioners, this is a sensible change. It removes the possibility of receiving a tax bill simply because State Pension increases have nudged income above the Personal Allowance. However, for most of the people we speak to, that wasn't the announcement generating the most questions.
The bigger concern tends to be: "What happens to my pension when I die?"
The change that could affect more families
From April 2027, most unused pension funds and pension death benefits will form part of a person's estate for Inheritance Tax purposes.Strictly speaking, this wasn't a new announcement in Budget 2026. The change was announced previously. However, with implementation now approaching, it is becoming increasingly relevant for retirement and estate planning discussions.
For many people, pensions have historically been viewed as sitting outside their estate. That assumption can no longer be made automatically. The result is that pensions, wills, inheritance planning and retirement income decisions are becoming much more closely linked.
Why this matters
Imagine two people with broadly identical wealth. One has built up significant ISA and investment holdings and has been drawing income from their pension. The other has deliberately preserved their pension and spent other assets first. Historically, the second approach often carried inheritance planning advantages for some individuals. From April 2027, the position may look rather different.
That doesn't necessarily mean previous planning was wrong. It simply means some assumptions may need revisiting. As is often the case with financial planning, the best answer depends on individual circumstances.
This isn't just about tax
Whenever inheritance tax is mentioned, discussions immediately become focused on tax bills. In reality, most people care about something else first.
They want to know:
- Who gets what?
- Will things happen smoothly?
- Have I accidentally created complications for my family?
- Do my pension nominations still reflect my wishes?
- Does my will still make sense?
Those are often more important questions than the tax calculation itself. The Budget may have put pensions back into the spotlight, but for many families it provides a useful prompt to review existing arrangements.
Three questions worth asking
1. Do you know who would receive your pension?
Many people completed a nomination form years ago and haven't looked at it since. Life changes. Relationships change. Families change. A pension nomination completed ten or twenty years ago may no longer reflect your wishes.
2. Does your will still work alongside your pension?
One of the most common misunderstandings is assuming that a Will controls everything. Pensions often operate separately from the estate and may have different beneficiary arrangements. That means it is important to look at pension nominations and Wills together rather than in isolation.
3. Are you drawing retirement income in the way you originally intended?
The changing treatment of pensions may alter the answer to questions such as:
- Which assets should I spend first?
- Which assets should I preserve?
- How much income should I take?
- What am I trying to leave behind for family?
Again, there is rarely one answer that fits everyone.
Retirement planning and estate planning are becoming more connected
One of the themes we've seen over recent years is that retirement planning and estate planning are increasingly overlapping. A pension decision may affect inheritance planning. An inheritance planning decision may affect retirement income. A Will may need to work alongside pension nominations and other assets.
That is why we are seeing more families benefit from looking at the bigger picture rather than considering each issue separately.
Stephanie Woodward, MD of Financial Services viewpoint
The new Pension Tax Allowance introduced in the Budget is sensible. But I suspect it won't be the part of the Budget that most families remember.
The bigger conversation is likely to be around how pensions fit into wider retirement and inheritance planning as the April 2027 changes approach. For some people, a review will simply provide reassurance that everything is already in order. For others, it may identify opportunities to update nominations, revisit retirement plans or ensure family members are protected in the way they intended.
The important thing is understanding what would happen if the worst were to happen tomorrow, rather than assuming everything will work as expected.
Thinking about your own position?
If you're unsure how your pension, investments, savings and estate planning arrangements fit together, it may be worth reviewing them as a whole rather than looking at each piece separately.
At Poole Townsend, our Financial Planning and Legal teams regularly work together to help clients understand how retirement planning, inheritance planning, wills and pension arrangements interact. Get in touch with the team.
This article is for general information only and does not constitute financial, legal or tax advice. Tax treatment depends on individual circumstances and may change in future. Pension and inheritance planning decisions should be considered carefully and, where appropriate, after obtaining professional advice. The value of investments can fall as well as rise and you may get back less than you invest.