The Generation Game

A little under a year ago, Rachel Reeves, the Chancellor of the Exchequer, announced plans to remove the inheritance tax (IHT) relief on unused pension funds when a taxpayer died after the age of 75. Reeves said that the aim was to “restore the principle that pensions should not be a vehicle for the accumulation of capital sums for the purposes of inheritance, as was the case prior to the 2015 pension reforms”.

On 21 July 2025, the government published the draft legislation to put this into effect and, subject to parliamentary approval, IHT will become chargeable on these funds from 6 April 2026.

Once Upon a Time…

Historically, pension funds – contributions to which attracted income tax relief along with valuable tax relief on the funds themselves – were to provide an income in retirement. Granting IHT relief on the funds meant that – for those who could afford it – there were tax advantages to using other savings and assets to fund retirement and then passing the pension funds to the next generation. Since 2015, some savers may have added extra contributions to their pension funds with a view to passing on wealth in this way.

That option – which may have been attractive to those thinking of skipping a generation and bequeathing the pension fund to, say, their grandchildren – will now disappear. This, combined with the forthcoming reductions in IHT relief for agricultural and business property, may have prompted individuals to consider other taxefficient options for their descendants.

Individual Savings Accounts

Although a junior Individual Savings Account (ISA) can only be opened by a parent or guardian, anyone can contribute to it up to the maximum annual limit of £9,000. NFU Mutual has reported a 115% rise in new junior ISAs opened in the first quarter of 2025 compared to the same period in 2024. Additional contributions to existing junior ISAs have nearly doubled and the amounts being invested have also increased.

As with standard ISAs, junior ISAs can hold either cash or stocks and shares. The money or assets in the junior ISA cannot be accessed until the beneficiary reaches the age of 18, but this may add to its attraction as a useful means of accumulating wealth for the next generation. As always, the donor must survive for seven years after the gift for this not to be taken into account in calculating IHT.

Stick With Pensions?

Rather than a grandparent seeking to bequeath their own pension, remember that a pension plan can be opened for a child as soon as they are born. Unless they have earned income, the net annual contributions will be limited to £2,880. This can be paid into the pension and is treated as net of 20% income tax, so the government will add a further £720, so £3,600 is in the pension fund.

The restrictions on withdrawal are strict, and generally the beneficiary will not be able to access the pension funds until they reach the normal minimum pension age (55 now, but increasing to 57 from 2028) but this may be seen as an advantage, providing means for a long-term investment and a secure retirement. Financial advice should be taken because the existence of a pension plan could potentially have tax implications on future pension savings in adulthood.

Tax-Free Gifts

The above payments to a junior ISA or pension may be treated as potentially exempt transfers for IHT purposes. However, those making gifts should remember the annual exemption of £3,000 and small gift exemption of £250. There are also exemptions for weddings.

If regular annual payments are being made, the ‘normal gifts out of income’ exemption may be relevant, although this is subject to conditions.

Practical Tip

Advantageous tax treatment is only one aspect of saving and investment. The information above should be reinforced by professional financial advice to ensure that the transfers of money match the requirements of the donee as well as the donor.