Inheritance tax changes, pensions and the crowing role of Group Life Assurance 

The Spring Budget 2026 introduced a shift in how pension savings are treated for inheritance tax, and it is likely to change how employees approach long term financial planning.

This more than a technical update. It affects how an individual’s estate is structured, how inheritance tax is assessed and how effective pensions remain as part of broader estate planning.

For employers, this can create a clear point to reassess whether your employee benefits package and overall benefits strategy still deliver the level of protection employees expect.

What is changing for inheritance tax and pensions

Up to now, pension savings have often sat outside an individual’s estate for inheritance tax calculations, which made them a particularly effective tool for passing on wealth. In many cases, individuals would preserve pension assets specifically for this purpose, using other savings to fund retirement instead.

The upcoming Inheritance Tax changes 2026 alter that position. From April 2027, many types of pension savings may be included within the estate for IHT purposes, depending on individual circumstances.

For employees whose estates exceed the available thresholds, this could result in a 40% liability on funds that were previously outside the scope of inheritance tax. While certain protections remain, including transfers between spouses, the overall direction is clear. Inheritance tax pensions rules are becoming more restrictive, and the role pensions play in estate planning is changing as a result.

A more complex tax picture

These IHT pension changes do more than increase potential tax exposure. They also make outcomes harder to predict. Employees may now face a combination of inheritance tax and income tax, depending on how benefits are paid and who receives them. This interaction between inheritance tax and income tax treatment creates a more layered and, in some cases, unexpected outcome.

As a result, relying on pensions alone as a legacy planning tool becomes less effective. Employees are likely to need a broader approach to managing their estate, and that is where the benefits provided by employers start to play a more visible role.

Where life assurance becomes more relevant

As pensions become less efficient in this context, life assurance starts to play a more important role. This naturally raises a few key questions:

• Is life insurance subject to inheritance tax UK?
• Are life insurance policies included in an estate for inheritance tax purposes?
• How does death in service tax treatment work in practice?

For Group life assurance, the answer is typically no, provided the scheme is structured correctly. Most death in service arrangements are written under trust, which means payouts do not usually form part of the employee’s estate for inheritance tax purposes.

This distinction becomes increasingly important as the treatment of pension savings evolves.

The role of Group Life Assurance

This is where Group Life Assurance and Death in Service Cover become more than just a standard benefit.

Unlike some pension death benefits affected by changes to inheritance tax treatment, a death in service payout can provide a lump sum to beneficiaries that is typically outside of the employee’s estate, where structured appropriately.

The lump sum death benefit allowance (LSDBA) will also influence how certain benefits are assessed, adding another layer to how protection should be considered.

In practical terms, this means Group Life Assurance can play a valuable role in helping to mitigate a potential tax liability, while giving employees and their families greater certainty over the financial support available to them.

Rethinking Death in Service Cover

Traditionally, Death in Service Cover has been based on a multiple of salary, often four times. While this approach is still widely used, it is based on older assumptions that may not reflect today’s tax environment. As inheritance tax and pensions rules evolve, employers are starting to question whether this structure still provides adequate protection.

A more considered approach might include reviewing:

• how cover aligns with potential inheritance tax exposure
• how death in service tax treatment fits within wider financial planning
• whether flexibility in Group Life Assurance design could better support employees

Modern schemes can allow for this level of flexibility, making it easier to design benefits that reflect current risks rather than historic norms.

Cost, value and employee expectations

Despite its growing importance, Group Life Assurance remains a relatively low cost benefit. For many employers, Death in Service Cover represents a cost effective way to strengthen their employee benefits package while providing meaningful financial protection.

At the same time, expectations around employee benefits are shifting. Employees are more aware of financial wellbeing and are placing greater value on benefits that offer tangible support. In this context, life assurance becomes a more visible and valued part of the overall employment proposition, rather than sitting in the background.

A shift worth paying attention to

The inheritance tax changes from 2026 represent a broader shift in how IHT, pension savings and the estate interact. Pensions remain a key part of long term financial planning, but they may be less effective on their own when it comes to passing on wealth.

For employers, this creates an opportunity to take a more joined up view of their benefits strategy, ensuring that protection, tax considerations and employee needs are considered together rather than in isolation.

The bottom line

As the link between inheritance tax, pension savings and the estate becomes more pronounced, relying on a single solution is unlikely to be enough. A more balanced approach is needed, and Group Life Assurance has a clear role to play within that.

For employers, it offers a straightforward way to provide tax efficient support when it matters most, while helping to ensure your employee benefits package remains relevant in a changing landscape.

Key takeaways:

Please note:

This article is for general information only and does not constitute advice.

All information is correct at the time of writing and is subject to change in the future. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, trusts, Lasting Powers of Attorney, or will writing.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.