Inheritance tax changes for teachers

Introduction

While 6th April 2027 may seem like a while away, for those with unused pension savings, the countdown has already begun. A major shift in UK inheritance tax (IHT) rules is approaching, and it could significantly change how your wealth is assessed and passed on.

Pensions will no longer sit comfortably outside of inheritance tax from the start of the 2027 tax year. For many families who stand to inherit, this change could result in a potential 40% tax bill on assets they believed were already safeguarded.

Tax treatment depends on your individual circumstances and may be subject to change in future.

Will teachers’ pensions be impacted?

Crucially, the change will only apply to Defined Contribution (DC) pension schemes. As the Teachers’ Pension Scheme (TPS) is a Defined Benefit (DB) scheme, your teachers’ pension will not be impacted. This also applies to the Local Government Pension Scheme (LGPS) as a DB scheme.

That’s because DB schemes, like the TPS, provide a guaranteed, index-linked income in retirement based on your salary and length of service. They do not build up an individual investment pot, so they remain outside of scope for the new IHT rules.

Whereas DC schemes work by investing your contributions into a personal pension pot to save for retirement. Whatever remains in this pot of money upon your death will be brought into calculations for IHT liability.

However, if you’ve chosen to top up your TPS by making Additional Voluntary Contributions (AVCs) or to contribute to a private pension, these contributions will form part of a DC scheme. So, these changes could impact your IHT liability.

With the standard IHT allowance (nil‑rate band) frozen at £325,000 per person (£650,000 for couples), and your home counted separately under the residence nil‑rate band, it’s easy to see how pension savings could push your estate over the threshold.

What are the risks?

Arguably, the biggest risk is simply doing nothing. If you want to try and mitigate this risk, it may be worth engaging in estate planning.

This isn’t something that can be done in a rush. It requires careful modelling, legal structuring and a clear understanding of how different assets interact within your estate.

As 2027 draws closer, the demand for specialist advice is rising. And the nearer we get to the deadline, the harder it may be to implement well-structured plans in a calm and controlled way.

The key questions to ask yourself are:

• How exposed is your pension under the new rules?
• What would a 40% tax charge mean for your family’s future?
• Which assets should be preserved, and which should be used or transferred earlier?
• How can wealth be passed between generations without creating new tax complications?
• And crucially, can you act in time?

Remember, doing nothing is no longer a neutral decision. This change has the potential to impact ordinary families, meaning it is no longer a tax just for the super wealthy.

How can I prepare?

This is a fundamental shift to how estate planning works, especially for those who were relying on pensions as a tax-efficient way to pass their wealth on.

Even if you’ve previously engaged in estate planning, this may need to be revisited if you have:

• AVCs linked to your TPS, or
• A private pension alongside your TPS
• Preserved pensions from previous non-teaching employments
• A partner whose pensions are DC based from whom you could inherit

Understanding your exposure early gives you the widest range of options. Whether that involves adjusting how you draw income, restructuring assets, or planning intergenerational transfers, the sooner you begin, the more control you may be able to retain.

Please note the Financial Conduct Authority (FCA) does not regulate inheritance tax planning and trusts.

Get personalised guidance

The countdown to the 2027 inheritance tax changes has already begun. Acting early gives you more time to understand your exposure and explore your options.

A Specialist Financial Adviser from Wesleyan Financial Services can help you model different scenarios, assess the potential impact on your pension savings and build a tailored strategy to protect your wealth for future generations.

Book an appointment to begin or revisit your estate planning. Advice charges may apply.