Pensions and Inheritance Tax: What the 2027 Changes Mean for You
For decades, pensions have been one of the most powerful tools available for passing wealth to the next generation free of inheritance tax. That is about to change.
From 6 April 2027, most unused pension funds will be brought into your estate for inheritance tax purposes — a seismic shift that could significantly increase the tax bill your family faces when you die. If you have a pension pot, a property, and other savings, this change may affect you more than you realise.
In this article
Quick Summary
This may help you:
- From 6 April 2027, most unused defined contribution pension funds will be included in your estate for inheritance tax (IHT) purposes.
- IHT is charged at 40% on the value of your estate above the nil-rate band (currently £325,000, or up to £500,000 with the residence nil-rate band).
- For pensions inherited from someone who died after age 75, beneficiaries will also pay income tax on withdrawals — creating a potential combined tax rate of over 60%.
- HMRC estimates around 10,500 additional estates will face an IHT liability for the first time, and 38,500 estates will pay more IHT on average than they do today.
Before deciding, check:
- Spousal and civil partner exemptions remain: pensions passed to a spouse or civil partner are still free of IHT.
- Now is the time to review your pension nomination forms, your overall estate plan, and whether any restructuring makes sense for your circumstances.
Part of the Passing Down Wealth series
- Passing Down Wealth: Estate Planning Principles Explained
- How Wealth Is Passed Down Between Generations
- Pensions and Inheritance Tax: What the 2027 Changes Mean for You
What is changing and when?
On 30 October 2024, the UK government announced in the Autumn Budget that unused pension funds and death benefits payable from a pension will be included in the deceased's estate for inheritance tax purposes from 6 April 2027.
This marks a fundamental reversal of the position that has existed since 2015, when defined contribution pensions were effectively removed from the scope of IHT. The new rules will apply to most defined contribution (DC) pension schemes — the type where you build up a personal pot through contributions and investment growth.
The government has confirmed that scheme administrators will become liable for reporting and paying any IHT due on pension funds directly to HMRC. This is a new administrative burden on pension providers and may affect how quickly beneficiaries receive funds.
How does inheritance tax currently work?
Inheritance tax is charged at 40% on the value of your estate above the nil-rate band. For 2025/26, the nil-rate band is £325,000. If you leave your main residence to direct descendants (children or grandchildren), an additional residence nil-rate band (RNRB) of £175,000 is available, taking the potential combined threshold to £500,000.
For married couples and civil partners, unused allowances can be transferred to the surviving partner, meaning a couple could potentially pass up to £1,000,000 free of IHT to their children.
Assets passing to a spouse or civil partner are completely exempt from IHT, regardless of value. Gifts made more than seven years before death are also generally exempt.
Currently, pension funds held in defined contribution schemes fall outside of your estate entirely and therefore outside the scope of IHT. This makes them an extremely tax-efficient vehicle for passing wealth to the next generation.
For more information on how inheritance tax is calculated and the current nil-rate bands, visit the MoneyHelper website at www.moneyhelper.org.uk — the government's free, impartial money guidance service.
Why were pensions IHT-free before?
The reason pensions have historically sat outside your estate for IHT purposes is rooted in their legal structure. Most defined contribution pensions are held in a discretionary trust by the pension provider. This means the funds are not legally yours — they are held by the trustees of the pension scheme, who have discretion over who receives them when you die.
Because the funds are not part of your estate in the legal sense, they have not been subject to IHT. This is why financial planners have long recommended that wealthy individuals consider spending other assets first — such as ISAs, investment accounts and savings — and preserving their pension for inheritance purposes.
From April 2027, this advantage will largely disappear for most pension holders.
What will change from April 2027?
Under the new rules, the value of unused pension funds remaining at death will be included in the deceased's estate and subject to IHT at 40% above the applicable nil-rate bands.
The key points to understand are:
The rules apply to defined contribution pensions — the most common type in the UK, including workplace defined contribution schemes and personal pensions (SIPPs). Defined benefit (final salary) schemes work differently and their death benefits are assessed separately.
Spousal and civil partner exemptions still apply — pensions passed directly to a spouse or civil partner will remain free of IHT. The change primarily affects pensions left to children, grandchildren or other beneficiaries.
The nil-rate band still applies — your pension value is added to the rest of your estate and IHT is calculated on the combined total above your available thresholds.
HMRC's own impact assessment estimates that around 213,000 estates will be affected when the changes come in. Of those, approximately 10,500 estates will face an IHT liability for the first time, and around 38,500 estates will pay more IHT than they would today — with an average additional liability of £34,000.
The double tax trap: IHT plus income tax
One of the most significant concerns for affected families is the potential for pension funds to be taxed twice — once through IHT and again through income tax when beneficiaries make withdrawals.
When someone dies before age 75, beneficiaries can inherit the pension and make withdrawals completely free of income tax (alongside the IHT already paid on the fund). However, when someone dies aged 75 or over, withdrawals from the inherited pension are taxed as income at the beneficiary's marginal rate — which could be 20%, 40% or 45%.
This creates a scenario where, for higher-rate taxpaying beneficiaries inheriting from someone who died after 75:
- IHT is charged at 40% on the pension value above the nil-rate band
- Income tax of up to 45% is then charged on withdrawals from the remaining fund
HMRC has acknowledged this issue and has indicated that a credit mechanism will be introduced to prevent the combined effective rate exceeding certain levels. However, as of the time of writing, the precise detail of this mechanism has not been fully legislated.
This is an area where professional financial advice will be essential — the interaction between IHT and income tax on inherited pensions is complex, and the rules are still being finalised.
Who will be most affected?
The people most likely to feel the impact of these changes are those who have:
Large defined contribution pension pots — particularly those who have already reached the stage of drawing other assets first as part of an estate planning strategy.
Total estates (including pensions) that exceed the nil-rate bands — if your estate including your pension is below £325,000 (or £500,000 with the RNRB), you may not be affected at all.
Children or grandchildren as intended beneficiaries — spousal transfers remain IHT-free, so couples who plan to leave everything to each other first are less immediately affected.
Already-crystallised drawdown funds — if you have moved your pension into drawdown but are not drawing income from it, that fund will still count as part of your estate under the new rules.
According to the HMRC analysis, the changes are expected to affect a relatively small proportion of all estates — but for those affected, the sums involved can be very significant.
What can you do now to prepare?
There are several steps worth considering, though the right course of action depends entirely on your individual circumstances. This article provides general information only — please speak to a qualified financial adviser before making any decisions.
Review your nomination forms — pension nomination forms (also called expression of wishes) tell the pension trustees who you would like to receive your pension when you die. Historically many people nominated children or other family members specifically to take advantage of the IHT exemption. With that exemption reducing from 2027, it is worth reviewing whether your nominations still reflect your wishes and your broader estate plan.
Consider your overall estate structure — with pensions no longer offering the same IHT advantage, it may be worth revisiting the order in which you plan to draw down different assets. A financial adviser can model different scenarios to understand the most tax-efficient approach for your specific situation.
Consider life insurance in trust — a whole-of-life policy written in trust can pay out a sum to cover an expected IHT liability without adding to your estate. Premiums can be funded through annual gifting allowances where appropriate.
Review gifting strategies — the annual gift allowance (£3,000 per year, with the ability to carry forward one year's unused allowance) and other gifting exemptions remain available. Making gifts during your lifetime can reduce your estate and therefore reduce the IHT on your pension when it is added in.
Do not rush into restructuring — these rules are not in force yet and some details are still being finalised. Significant changes to your pension strategy before the rules are confirmed could be premature. Take professional advice.
Key Considerations
| Factor | What to consider |
|---|---|
| Implementation date | The changes take effect from 6 April 2027 — you have time to plan, but the earlier you act the more options you have. |
| Spouse/civil partner exemption | Pensions left to a spouse or civil partner remain IHT-free. The change primarily affects those passing pensions to children or others. |
| Your nil-rate band | If your total estate including your pension is below £325,000 (or £500,000 with RNRB), you may not be affected. |
| Double taxation | For deaths after age 75, beneficiaries face both IHT and income tax. A credit mechanism is expected — but details are still being finalised. |
| Nomination forms | Review who you have nominated on your pension — it may need updating as part of a revised estate plan. |
| Defined benefit pensions | These are affected differently — speak to your scheme administrator or a financial adviser for clarity. |
| Get professional advice | The interaction between pension rules, IHT, and income tax is complex. A qualified adviser can model your specific situation. |
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Financial planning decisions depend on individual circumstances. If you would like clarity on how the topics discussed may apply to your situation, TrustEvo can connect you with a regulated financial adviser.
This article is provided for general information only and does not constitute financial advice. Financial decisions depend on individual circumstances and regulated financial advice may be appropriate in some situations.