Pensions expert warns limits of AI for inheritance tax calculations as 2027 rule change brings pensions into IHT scope

A pensions expert has cautioned that artificial intelligence can mislead people trying to work out inheritance tax liabilities, and explained how a planned April 2027 change will bring pensions into the scope of inheritance tax (IHT) and require a pro rata allocation across estate assets.

Steve Webb, a former pensions minister and current pensions expert, wrote in a This is Money column published by the Daily Mail that AI tools can be useful for research but are prone to errors, can ‘‘hallucinate’’ facts, and often omit important legal or procedural details that affect tax outcomes. He used a reader’s example to illustrate how an AI answer could be technically correct in part but still lead to wrong conclusions about who must pay an IHT bill.

The reader’s estate in the example consisted of a house worth £625,000, cash of £40,000, cars and other assets of £32,000, debts of £32,000, and a pension pot of £900,000. The reader said an AI tool had concluded the pension would not be part of the ‘‘estate’’ because it is held in trust, and therefore could not be used to meet IHT liabilities. Based on that premise, the reader calculated a gross estate of £1,565,000 and, assuming £1 million of available exemptions, estimated an IHT bill of about £226,000 that would have to be met largely by selling the home.

Webb said the AI’s assertion was ‘‘technically correct up to a point’’ — pensions held in trust are not distributed under a will and trustees decide beneficiaries — but the conclusion that the pension cannot help meet an IHT charge was incorrect under the rules that will apply from April 2027. He explained that once pensions come within the scope of IHT, the overall IHT bill is allocated pro rata across all elements of the estate for IHT purposes, and that the pension’s share of the bill can be met from the pension pot before beneficiaries receive their payout.

Using the reader’s numbers, Webb calculated that the pension represents about 57.5% of the total estate value. Applying that share to the estimated £226,000 IHT bill produces roughly £130,000 of IHT attributable to the pension. That sum can be deducted by the pension scheme before payment, leaving about £770,000 from the pension pot to be distributed to beneficiaries. The remaining IHT liability — about £96,000 in Webb’s example — could then be met from other estate assets, including cash, sale of property, or by beneficiaries using part of their inherited pension (subject to income tax rules) if they elect to do so.

Webb also flagged other practical points that affect how decisions should be made. He noted that a policyholder’s 25% tax-free lump-sum entitlement cannot be taken after death, so taking tax-free cash during life does not change the IHT calculation but can alter how the estate’s wealth is taxed when received by heirs. He added that pensions may be paid tax-free to beneficiaries on death before age 75 in some circumstances, while withdrawals after age 75 are generally subject to income tax at the recipient’s marginal rate.

Beyond the technical corrections, Webb set out guidance on using AI for financial questions. He recommended users ask AI tools to provide sources — ideally official ones such as gov.uk — so answers can be independently verified. He warned that responses vary with how a question is asked and urged experimentation with different prompts. Most importantly, he said, people with substantial assets should seek independent human financial advice because AI tools do not yet replace the judgment, context and fiduciary responsibilities of qualified advisers.

The caution echoes wider concerns among financial professionals about the limitations of generative AI in regulated advice areas. AI models can synthesize information quickly and highlight potential issues, but they may omit jurisdictional nuances, fail to capture recent policy changes or misapply legal distinctions between estate law and trust law. Experts say those gaps are especially consequential in tax and estate planning, where small differences in timing, ownership structures and beneficiary designations can produce large monetary effects.

The UK government announced the change that brings pensions within IHT scope, effective April 2027, as part of broader pension and tax policy adjustments. The practical result, as Webb illustrated, is that trustees and beneficiaries will need to consider IHT exposure alongside existing rules on trust designation, nomination forms and death benefits when making plans.

Webb’s column concluded with an appeal for careful use of AI: the tools can assist research and point users to relevant documents, but they are not a substitute for professional advice when making irreversible financial decisions. He recommended checking AI outputs against official guidance and consulting an independent financial adviser for personalized planning, especially where estates exceed basic IHT thresholds or when multiple potential funding routes exist to meet any liability.