Inheritance tax changes: What you need to know

A change could affect how you pass on your wealth

Whether you’re still in the classroom, preparing to step away, or already enjoying retirement, understanding how your pension fits into your wider estate is becoming increasingly important.

From 6th April 2027, a major shift in inheritance tax (IHT) will come into force, and it could significantly change how your wealth is passed on.

For some educators, this could mean pension savings that were once outside the scope of IHT now being included when your estate is valued, potentially leading to a 40% tax charge for beneficiaries.

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

Will teachers’ pensions be affected?

The good news is that the Teachers’ Pension Scheme (TPS) and the Local Government Pension Scheme (LGPS) are not impacted by the rule change. That’s because they are Defined Benefit (DB) schemes as opposed to a Defined Contribution (DC) scheme.

DB schemes 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 does this mean for teachers at different life stages?

• If you’re still working

There’s still time to shape your retirement strategy, including how you use, grow or draw from any DC pension in the future.

• If you’re approaching retirement

This is a key time to understand how your pensions interact. Decisions about when and how to access DC savings could influence your exposure to IHT further down the line.

• If you’re already retired

Your plans may still benefit from a review, especially if you have DC pensions you haven’t accessed yet, or if you intend to leave pension wealth to family members.

Across all stages, the biggest risk is assuming this change won’t affect you and 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.

How can you 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 advice

Whether retirement is years away or already underway, understanding the 2027 changes and acting early gives you more time to assess 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 
• 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.