Pension Contributions & Inheritance Tax UK: What’s Changing in 2025

💼 Pension Contributions and Inheritance Tax: The 2025 Guide Every UK Resident Should Read

📚 Table of Contents

1. Introduction: Why You Can’t Ignore This Anymore

2. What Are Pension Contributions? (Explained Simply)

3. How Inheritance Tax (IHT) Works in the UK

4. 2025 Update: The Game-Changing Shift in Pension IHT Rules

5. How Pensions Were Previously Protected from IHT

6. What’s Changing in 2025—and Why It Matters

7. How to Minimise IHT on Your Pension in 2025 and Beyond

8. Private Pensions vs. Workplace Pensions: What You Should Know

9. Who Will Be Affected the Most by These Changes?

10. Strategies to Preserve Pension Wealth (Legally)

11. Common Mistakes People Make With Pension & IHT Planning

12. How to Include Pension Planning in Your Will

13. Tips for Passing Your Pension Tax-Efficiently to Loved Ones

14. Expert FAQs on Pensions and IHT

15. Conclusion: Be Proactive—Not Reactive
    
    

🧠 Introduction: Why You Can’t Ignore This Anymore

For years, pensions in the UK were one of the most inheritance tax-friendly ways to pass on wealth. But from April 2025, the game is changing—fast. If you’re planning to leave pension wealth to your children or dependents, you could be leaving them with a surprise tax bill unless you prepare now.

This blog covers everything you need to know about pension contributions, new inheritance tax rules, and what smart UK residents are doing to safeguard their legacy.

💼 What Are Pension Contributions? (Explained Simply)

Pension contributions are payments made into your retirement savings—either by you, your employer, or both.

There are three common types of pensions in the UK:

• Workplace pensions (auto-enrolled)

• Private personal pensions (SIPP)

• State pension (not affected by IHT or these changes)
  

You receive tax relief on these contributions:

• Basic rate taxpayers: 20% top-up

• Higher rate: claim additional relief via Self-Assessment
  
  

📝 Example: Pay £80 into your pension → HMRC adds £20 → Total = £100

🧾 How Inheritance Tax (IHT) Works in the UK

Inheritance Tax is charged at 40% on estates worth more than £325,000, or £500,000 if leaving to direct descendants.

What counts towards your estate:

• Property

• Cash

• Investments

• Some life insurance

• Now: pensions too
  

🛑 2025 Update: The Game-Changing Shift in Pension IHT Rules

Until now, pensions were excluded from your estate for inheritance tax—meaning your beneficiaries could receive them tax-free if you died before age 75.

From April 6, 2025, the government plans to include certain pension pots in the value of your estate for IHT purposes.

📌 Key Change: Some pension pots will now be subject to 40% inheritance tax if the estate crosses the IHT threshold.

⏪ How Pensions Were Previously Protected from IHT

Before 2025, pensions were

• Outside your estate for IHT

• Passed on tax-free if death occurred before age 75

• Subject to income tax (not IHT) if over age 75

This made pensions a smart way to pass on wealth tax-efficiently.

🔄 What’s Changing in 2025—and Why It Matters

🔹 Summary of Key Changes:

Old Rule

• Pensions outside IHT estate

• Tax-free if death < 75

• Income tax only after 75

New Rule (2025 Onwards)

• Certain pensions now included in estate

• Subject to IHT if part of estate exceeds threshold

• Both IHT and income tax may now apply
  

🔍 Which pensions are affected?

• Unused defined contribution pension pots

• Pensions not nominated to a beneficiary

• Drawdown accounts left untouched
  

🛡️ How to Minimise IHT on Your Pension in 2025 and Beyond

1. Nominate your beneficiaries properly

   • Use your pension provider’s nomination form
     

2. Start drawing down from your pension earlier

   • Reduces pot size = less exposed to IHT
     

3. Use your pension for income—not as a savings pot
   

4. Gift other assets (like ISAs) instead of your pension
   

🧮 Private Pensions vs. Workplace Pensions: What You Should Know

✔️ Workplace Pension:

• Auto-enrolment

• Managed by employer

• Often default into large funds

✔️ Private Pension (SIPP):

• More control

• Wider investment options

• Often used for estate planning

🧠 TIP: SIPPs allow more flexible death benefit nominations—critical under 2025 rules.

🎯 Who Will Be Affected the Most by These Changes?

• People with large private or drawdown pension pots

• Individuals who haven’t nominated a beneficiary

• Retirees planning to use their pension as a wealth transfer tool
  
  

🔐 Strategies to Preserve Pension Wealth (Legally)

• Review your pension nominations annually

• Reduce pension pot through phased drawdowns

• Contribute to your spouse’s pension

• Use “gifting” rules to move other assets outside the estate
  Consider trusts—but get professional advice
  

❌ Common Mistakes People Make With Pension & IHT Planning

• Not nominating or updating beneficiaries

• Letting large pension pots accumulate unused

• Not using ISAs or gifting as part of estate planning

• Assuming pensions are always tax-free (they won’t be)
  

🧾 How to Include Pension Planning in Your Will

Although pensions don’t pass via a will, your will should reflect your wishes to avoid disputes.

• Make your will and pension work together

• Let your executors know where nomination forms are

• Appoint a pension-savvy financial advisor as an executor, if needed
  
  

👨‍👩‍👧‍👦 Tips for Passing Your Pension Tax-Efficiently to Loved Ones

• Pass to younger beneficiaries (they get more income options)

• Use pension drawdown to reduce pot over time

• Combine pensions with life insurance in trust

• Educate your heirs on how pensions are taxed
  
  

❓ Expert FAQs on Pensions and IHT

Q: Do I have to pay IHT on my state pension?
A: No, the state pension is not subject to IHT.

Q: Can I avoid IHT completely on my pension?
A: Only if you die before 75 and have nominated a beneficiary correctly.

Q: Is a SIPP better for IHT planning than a workplace pension?
A: Usually, yes—due to greater control and flexible beneficiary options.

🧠 Conclusion: Be Proactive—Not Reactive

2025 is the year pension planning gets real. If your goal is to pass on your wealth tax-efficiently, the days of letting your pension sit untouched are over.

Here’s what to do now:

• Review your pension nominations

• Speak to a tax advisor

• Incorporate pension strategy into your estate plan
  

👉 Need help? Visit TaxTrimAssist.co.uk for expert guidance, or book a free 15-minute consultation today.