With changes to inheritance tax (IHT) rules on pensions due in April 2027, it’s understandable that some of the headlines have caused concern.
You might have seen stories suggesting that pensions could now be taxed as part of your estate, and found yourself asking:
“Should I stop paying into my pension?”
“Will my family lose a big chunk of my pension pot?”
Let’s take a breath and look at the bigger picture, because for most people, the short answer is: probably not.
So, what’s actually changing?
Right now, if someone dies after age 75, their pension can be passed on to beneficiaries, who then pay income tax on what they receive. From 2027, in some cases, that money may also become subject to inheritance tax.
But this change only applies if the total value of the estate (including the pension) exceeds the IHT nil-rate band.
In fact, the government forecasts that this change will affect only around 1.5% of estates in the 2027/28 tax year. In other words, this is most relevant for wealthier households — particularly those using pensions as a legacy planning tool.
Most people will need their pensions to live on
Let’s be honest: very few people have more in their pension than they’ll ever need.
Life expectancy is increasing. A 65-year-old woman today has a 1 in 4 chance of reaching her mid-90s.
And retirement isn’t cheap.
According to the Pensions and Lifetime Savings Association (PLSA), a single person needs around £31,300 per year to enjoy a moderate retirement lifestyle. For a more comfortable retirement, the figure jumps to £43,100 a year — and that’s after tax.
Even if you qualify for the full State Pension, there’s a substantial gap to fill. To generate that level of income from age 65 to 90, you'd likely need a pension pot in the region of £600,000.
What about care in later life?
The PLSA’s benchmarks don’t account for care costs, which are becoming a more pressing reality for many families.
• Residential care now averages £1,266 per week
• Dementia or nursing care costs can reach £1,554 per week
If care is required for just 3 to 5 years, the financial impact can easily reach six figures.
Inflation doesn’t stand still
A retirement income of £20,000 in 2015 would now need to be around £27,218 to retain the same buying power. If you’d retired in 2005, you’d need closer to £34,845 today.
It's a timely reminder that what feels like "enough" now may not stretch far enough in the future.
So what’s the takeaway?
Pensions are primarily there to support your retirement — not just to be passed on.
For most people, the bigger concern isn’t inheritance tax.
It’s outliving your money.
If your estate is likely to exceed the IHT threshold (particularly if you’ve built up substantial pension savings), there are strategies we can look at, including:
• Putting life insurance in trust
• Reviewing your pension nomination forms and estate plan
• Developing a sustainable drawdown strategy
But for the majority of people, the focus should be on understanding what kind of lifestyle your pension will actually support — and whether there’s a gap that needs addressing.
Let’s talk about your retirement plan
Whether you’re concerned about inheritance tax, wondering how much is “enough”, or simply want some peace of mind, we’re here to help.
Financial planning isn’t about guesswork — it’s about gaining clarity, making confident decisions, and building a future that supports your life.
At Willow Tree Financial Services, we offer calm, personalised advice on:
• Retirement and pension planning
• Mortgages and protection
• Investments and estate planning
All tailored to your goals, your values, and your real-life needs.
At Willow Tree Financial Services, we offer personalised advice on Financial Planning, Mortgages, Investments, Pensions, Personal & Business Protection, and Wills, Trusts & Estate Planning — all tailored to your individual goals and circumstances.
Call us on 01323 436680, get in touch here, or book an appointment here to get started.
We’re based in Polegate, East Sussex, and support clients across the South East and beyond.
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The Financial Conduct Authority does not regulate wills, trusts, estate planning, and lasting power of attorney. Will writing and lasting powers of attorney are not part of the Quilter Financial Planning offering and are offered in our own right. Quilter Financial Planning accept no responsibility for these aspects of our business.
