Big Changes to Inheritance Tax: Pensions No Longer a Free Pass After April 2026

For many years, pensions have been viewed not only as a way to fund retirement, but also—somewhat quietly—as a useful tool for passing wealth on to the next generation, thanks to generous inheritance tax (IHT) rules.

That’s about to change.

On 21 July 2025, the government published draft legislation confirming that, from 6 April 2026, unused pension funds left by individuals who die after age 75 will become subject to inheritance tax.

This is a major reversal of the post-2015 pension rules. If you’ve been planning to pass on your pension as a tax-free legacy, it’s time to review your strategy—and quickly.

Let’s break down what’s happening, what it means for you and your family, and what alternative options you may want to consider.

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Why Is This Happening?

Back in 2015, pension freedoms gave people more flexibility in how they accessed their retirement funds. This included the ability to leave unused pension funds to heirs without incurring IHT, even if the person died after age 75.

The idea was to encourage saving and allow individuals to manage their own retirement pot.

But critics argued this effectively turned pensions into an inheritance vehicle, especially for wealthier individuals who could afford to live off other savings and preserve their pensions to pass down to children or even grandchildren.

Now, Chancellor Rachel Reeves has made it clear she wants to “restore the principle that pensions should not be a vehicle for accumulating capital for inheritance.”

The government is closing that door.

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What Are the New Rules?

Starting 6 April 2026, if someone dies after the age of 75, and has unspent money in their pension, that money could be subject to inheritance tax, just like other assets.

Currently, pensions fall outside of your estate for IHT purposes—but under the new rules, they’ll be brought back in.

This means:

• Any remaining pension funds could face up to 40% tax if your estate exceeds the IHT threshold (£325,000 or £500,000 with the residence nil-rate band).
• This change applies regardless of whether the pension is in drawdown or untouched.

This doesn’t apply if the pension holder dies before age 75—those funds can still be passed on tax-free, for now.

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Who Will This Affect?

This change will mostly impact:

• Individuals who haven’t spent much of their pension by the time they die.
• Those who intended to pass down pension wealth to children or grandchildren as a tax-efficient legacy.
• Families whose total estates are already near or above the IHT threshold.

If you’ve built up a sizable pension pot and were planning to pass it on intact, this could mean a hefty tax bill for your beneficiaries after April 2026.

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What Should You Do Now?

If you’ve been thinking of using your pension as a way to leave wealth to your children or grandchildren, this change may affect your plans. But there are still options available to structure your wealth in a tax-efficient way.

Let’s look at a few alternatives:

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1. Open a Junior ISA (JISA) for Grandchildren

One increasingly popular alternative is to make use of Junior ISAs, which are tax-free savings accounts for children.

• Anyone can contribute to a child’s JISA (not just parents).
• The current annual limit is £9,000 per child per tax year.
• Funds are locked in until the child turns 18, making it a good long-term savings tool.

Data from NFU Mutual shows a 115% rise in new Junior ISAs in early 2025—likely in response to the pension changes.

Key IHT Note: Gifts into a JISA are treated as potentially exempt transfers. If the donor survives 7 years after making the gift, it will fall outside their estate for IHT purposes.

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2. Contribute to a Child’s Pension

Yes, you can open a pension for a child—even a baby!

• You can contribute up to £2,880 net per year.
• With 20% tax relief, the government adds £720, making the total £3,600.
• The child cannot access the money until at least age 57 (from 2028 onwards).

While this may seem a very long-term investment, it’s a powerful way to start building a secure retirement for future generations, and keep the funds outside your estate if structured correctly.

⚠️ Caution: Pension contributions made on behalf of a child may affect their own pension allowances in adulthood. It’s worth seeking financial advice before committing.

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3. Make Use of IHT Gift Exemptions

If you’re looking to pass on wealth more flexibly, don’t forget about these IHT exemptions:

• Annual exemption: You can give away £3,000 per year (or £6,000 if you didn’t use last year’s allowance).
• Small gifts: Up to £250 per person per tax year.
• Wedding gifts: Up to £5,000 for a child, £2,500 for a grandchild.
• Normal gifts out of income: Regular, documented gifts from surplus income can be exempt from IHT altogether, provided they don’t affect your standard of living.

These allowances can be used year after year and are simple ways to gradually reduce the size of your estate.

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4. Revisit Your Estate Plan

Given that this is just one of several recent IHT changes (including potential reductions to agricultural and business property reliefs), now is the time to review your estate plan.

Ask yourself:

• Am I relying too heavily on pension funds as a tax-free legacy?
• Have I made full use of gift allowances and trusts?
• Should I rebalance my assets (e.g., draw more from pensions now and preserve other assets)?
• Does my current plan still reflect the tax landscape?

Speaking to a tax or financial adviser can help you assess whether your estate is structured in the most tax-efficient way.

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Summary: What You Need to Know

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Need Help Reassessing Your Plan?

At Merranti Accounting, we help clients prepare for tax changes before they happen—so you’re not caught off guard.

If you’re unsure how this change will affect your estate, or want to explore other tax-smart ways to pass on your wealth, get in touch with our team today.

Let’s make sure your retirement plans and your legacy are protected—even in a changing tax world.