When I first heard that the Government was bringing pensions into the scope of inheritance tax (IHT), like everyone else, I thought it sounded pretty outrageous.
How could the Government have allowed several generations to plan their finances around one set of rules, only to drastically change them at short notice, undoing over a decade of careful tax planning?
But even as I thought about it, I realised that was exactly the problem. Pensions had become the centre of estate planning – a vehicle for passing on assets tax-free. But that isn’t what pensions were intended for.
Before 2015, you could typically take 25 per cent of your defined contribution (DC) pension pot, and rules heavily steered savers toward spending the rest on buying an annuity – a product that pays you a guaranteed income for the rest of your life.
When pension freedoms kicked in in 2015, meaning you could access your DC pension however you liked, they increasingly began to be viewed as a way to help estate planning rather than retirement saving.
Pensions ended up being free of IHT through a sort of loophole. Legally, you don’t technically own your own pension pot – it is held in a trust managed by the pension scheme trustees.
The trustees ultimately have the power to decide who the pension is paid out to, which means your pension doesn’t technically fall into your estate for IHT purposes.
For years, families have been piling their money into pensions, becoming increasingly fixated on passing it to their loved ones while avoiding the taxman.
Today, savers in their 70s, 80s, and 90s have amassed huge retirement savings pots, often while living in relatively modest homes with minimal other assets.
In many cases, the next generation down have already begun structuring their savings around this estate planning tool, stashing cash into their pensions with the view of passing it to their kids one day – before they have even inherited anything themselves.
The desperation to pass this money down has become so extreme that I’ve spoken to elderly savers actively sacrificing their own quality of life just to pass on their wealth.
But pensions were never supposed to be tax-free estate planning vehicles – they were originally intended to ensure people had enough money to stop working and enjoy retirement. They were designed to be spent.
The mindset around pensions has become reminiscent of how many people view their annual leave at work – they keep rolling over the maximum number of days every year for some future trip that never comes, meaning they never end up taking enough holiday.
Because this mindset has become so ingrained, people have begun to view it as a right. But the UK was always an outlier in allowing this much money to be passed on tax-free. Removing this loophole does not put us behind; it actually brings us in line with how most major countries tax generational wealth.
While I understand why those who have planned their finances in this way feel affronted by having the goalposts shifted, I think they should stop seeing it as a penalty and start viewing it as liberating. It presents them with new opportunities.
For one, retirees should feel more entitled than ever to spend their own cash rather than stashing it away for their kids. Doing so could provide a welcome boost for the wider economy, which ultimately benefits everyone.
For those who genuinely want to pass wealth on to loved ones, gifting rules in the UK continue to be generous, allowing people to pass this wealth on well in advance of dying. You need to survive seven years after making a significant gift for it to be fully free of IHT, but the middle years are tapered.
By gifting excess cash early, it could unlock spending in younger generations who are currently grappling with the soaring cost of living and stagnant growth, allowing them to buy homes earlier or be more entrepreneurial. That, in turn, could boost the economy further.
A big concern I hear from those who want to gift money is the fear of leaving themselves short in later life. But that is exactly what annuities are there for, and now is actually a great time to buy one.
Annuities were unpopular for many years because low interest rates meant they offered relatively poor returns, but higher interest rates over the past few years have meant they offer vastly better value.
The average annuity rate was 7.62 per cent as of March 2026, according to insurer Standard Life. That means a healthy 65-year-old with a £100,000 pension pot can lock in a guaranteed annual income of up to £7,620.
With £300,000, you could generate £22,860 income annually – with the full new state pension, that’s an annual income of almost £35,000 a year.
Bringing pensions into the scope of IHT was never going to be popular, but it is a necessary correction to a system that had lost sight of its purpose. It’s a shift that could ultimately boost retirees’ quality of life and the wider economy in the process.
Pensions were invented to protect people from old-age poverty, not to pass tax-free fortunes down the generational ladder. Returning them to their original purpose isn’t just fair – it might just remind a generation of savers how to finally enjoy their money.