Ex-pensions minister: AI flagged some points on inheritance tax but misread how pensions can meet the bill
Steve Webb cautions that artificial intelligence can err on personal finance and explains how pensions held in trust will be treated for inheritance tax from April 2027
A reader who used an artificial intelligence tool to model their inheritance tax bill was broadly right that pensions held in trust are not part of the estate governed by a will, but wrong to conclude that the pension could not be used to meet an inheritance tax (IHT) liability, former pensions minister Steve Webb said.
Webb, now a partner at consulting firm Lane Clark & Peacock and the pensions agony uncle for This Is Money, told the reader that AI can be helpful for preliminary research but warned of the technology's limitations, including the risk of incorrect answers or "hallucinations." He advised users to ask AI for sources, preferably official ones such as gov.uk, and to seek human independent financial advice for complex situations.
In the reader’s example, assets were listed as a house worth £625,000, cash of £40,000 and a pension pot of £900,000, with cars and loans that net out to zero. That produces a gross asset total of £1,565,000. The reader assumed a £1 million inheritance tax exemption by the time of the second death and used that to calculate an IHT bill of £226,000 on the £1,565,000 total.
Webb said the AI was correct that pensions in trust are not part of the estate under the will. But he explained that, from April 2027, pensions will come within the scope of inheritance tax and the IHT liability will be allocated pro rata across the different elements of the estate for IHT purposes. In the reader’s numbers the pension represents about 57.5 percent of the total assets (approximately £900,000 of £1,565,000), so roughly 57.5 percent of the £226,000 IHT bill — about £130,000 — would be attributable to the pension.
Because that portion is attributable to the pension, Webb said the pension scheme can deduct the appropriate share of IHT from the pension before paying out to beneficiaries. That would leave about £770,000 of the pension after the pension’s IHT share, to be split between two children in the reader’s example. The remaining IHT bill — about £96,000 after the pension contribution — could be met from cash, sale of other assets such as the house, or by beneficiaries using income from pension withdrawals to meet the charge, Webb added. He noted that withdrawals by beneficiaries could be subject to income tax if the deceased was aged 75 or older when they died and the pension funds are taken in drawdown.
Webb also set out the implications of transfers between spouses. If one partner dies before the other and leaves assets to the surviving partner, those transfers are exempt from inheritance tax and the surviving spouse generally inherits unused nil-rate bands, including the residence nil-rate band where applicable, which can increase the exemptions available on the second death.
On the question of taking tax-free cash now, Webb said the 25 percent tax-free lump sum cannot be taken after the policyholder’s death. If taken while alive and then invested, that cash remains part of the estate for IHT but would not be subject to income tax when received by beneficiaries. However, he declined to give personal financial advice, saying those decisions depend on many factors specific to the individuals involved.
Webb reiterated practical safeguards for people using AI for finance. He said users should treat AI output as a starting point, check sources, and be cautious when relying on AI for unfamiliar subjects. He recommended asking the AI for official sources such as gov.uk so readers can verify the guidance independently.
The former minister recommended professional financial advice for someone with assets above a million pounds, noting there are other planning options and details specific to individual circumstances that a human adviser could review.
Steve Webb is available to answer readers’ pension questions for This Is Money, though his replies are not regulated financial advice. Readers can email questions to pensionquestions@thisismoney.co.uk. The Government-backed MoneyHelper service also offers free assistance on pensions and can be contacted at 0800 011 3797.