Question: I am a teacher. I have read about the government putting inheritance tax (IHT) on pensions and am now worried about how it will affect me and my family when my pension is passed to my wife. Can you let me know what the implications are for me and others in my situation?
Answer: There has been a lot of coverage about the rules on pensions and IHT changing from April 2027. But it’s worth noting that the changes won’t affect everyone in the same way.
Those who work in the public sector usually have defined benefit (DB) pensions, where the pension they receive depends on how long they have worked and what their salary was. Although they are only slightly affected by the changes, it’s worth understanding what benefits are paid on death and where IHT may apply.
Let’s start with where IHT doesn’t apply. If the pension holder dies, part of their pension will usually continue to be paid to their spouse, civil partner or partner at a reduced rate. The person receiving it will normally pay income tax on these payments, but these payments would not count as part of the estate for IHT.
If the pension your beneficiary would receive is very small, the scheme may offer a one-off cash payment instead. If that happens, this lump sum would sit outside your estate and would not count when working out IHT.
