Pensions and Inheritance Tax: What Changes from April 2027?
Pensions have traditionally been an important part of estate planning because most unused pension funds could be passed on outside the estate for Inheritance Tax purposes.
That is changing.
From 6 April 2027, most unused pension funds and pension death benefits will be included when calculating the value of a person's estate for Inheritance Tax (IHT).
For some families, this could significantly increase the amount of IHT payable.
What is changing?
The new rules apply where a pension scheme member dies on or after 6 April 2027.
Under new section 150A IHTA 1984, introduced by Finance Act 2026, most unused pension funds and death benefits will be treated as part of the deceased's estate.
Importantly, this can apply even where the pension is held under a discretionary arrangement or is sometimes described as being "written in trust".
This means an expression of wish form will no longer determine whether the pension falls outside the estate for IHT.
It can still be important in deciding who receives the pension, but it will not by itself prevent an IHT charge.
If the pension holder dies before 6 April 2027, the existing rules continue to apply even if the pension is paid to the beneficiaries after that date.
Will every pension be caught?
No.
Certain benefits remain outside the new rules, including some:
death-in-service benefits;
dependant's scheme pensions;
joint-life and dependant annuities; and
other specified pension death benefits.
The normal spouse and civil partner exemption will also continue.
So if pension benefits pass to a surviving spouse or civil partner, there will generally be no immediate IHT charge.
The position can be very different where the pension ultimately passes to children or other beneficiaries.
Why could this make such a big difference?
Imagine someone currently has:
Property, savings and investments: £1.4 millionUnused pension: £700,000
Under the existing rules, the pension may sit outside their estate for IHT.
From April 2027, the estate for IHT purposes could instead be worth around:
£2.1 million
before considering exemptions and available allowances.
This does more than simply add £700,000 to the estate.
Once an estate exceeds £2 million, the Residence Nil Rate Band starts to be withdrawn.
So bringing pension wealth into the estate could potentially create an additional IHT cost by reducing another valuable allowance.
Could the pension also suffer Income Tax?
Potentially, yes.
The existing Income Tax rules applying to inherited pensions are not disappearing.
For example, pension benefits inherited following the death of someone aged 75 or over can generally be subject to Income Tax when the beneficiary draws the money.
From April 2027, the pension could therefore be relevant for both IHT and Income Tax.
There are rules to prevent Income Tax being charged on the portion of the pension used to meet the IHT liability, but beneficiaries could still face a substantial overall tax cost.
This makes pension and estate planning much more important.
Who will deal with the IHT?
The deceased's Personal Representatives will generally be responsible for identifying pension arrangements, including them when calculating the estate and dealing with the IHT position.
New procedures will allow pension administrators to withhold funds and, in certain circumstances, pay the IHT attributable to the pension before releasing the remaining benefits.
This is likely to make administering some estates more complicated, particularly where several different pension schemes are involved.
What should you consider before April 2027?
The new rules do not necessarily mean you should start withdrawing your pension.
Pensions still have significant tax advantages and, most importantly, are there to fund your retirement.
But anyone with a sizeable pension should consider reviewing their estate planning before the rules change.
1. Work out your estate including your pensions
Look at your:
home and other property;
savings and investments;
business interests;
pensions;
life insurance; and
other significant assets.
Then consider what your estate could look like with your pensions included.
Some people who currently have no IHT exposure may find that they will have one from April 2027.
2. Review your Will and pension nominations
Check that your Will and pension expression of wish forms still reflect what you want to happen.
Pension nominations remain important even though they will no longer automatically keep the pension outside the IHT calculation.
This is particularly relevant if you are married or in a civil partnership, because assets passing to a spouse or civil partner can normally qualify for the IHT spouse exemption.
3. Consider whether taking pension benefits makes sense
For some people, taking pension benefits during their lifetime and then spending or gifting the money could form part of their estate planning.
But withdrawing money from a pension can create Income Tax and other consequences.
Simply moving pension money into a bank account or ISA does not solve the IHT problem either — those assets will normally still form part of your estate.
4. Consider lifetime gifting
Money withdrawn from a pension could potentially be gifted.
Some gifts may fall outside the estate if the donor survives for seven years.
There is also a valuable exemption for normal expenditure out of income, which can potentially allow regular gifts to fall outside the estate immediately where all the conditions are satisfied.
This can be particularly useful for people receiving more pension and other income than they need to maintain their normal standard of living.
5. Watch the £2 million threshold
From April 2027, pension wealth can also push an estate above the £2 million Residence Nil Rate Band taper threshold.
The Residence Nil Rate Band is reduced by £1 for every £2 that the estate exceeds £2 million.
For people around this level, relatively small changes to their estate planning could therefore have a significant effect.
6. Think about how the tax would actually be paid
Estate planning is not only about reducing tax.
It is also about making sure there will be enough accessible money to pay it.
Some people may consider life insurance written in trust to provide funds to meet an expected IHT liability without requiring beneficiaries to sell property or other assets.
Don't make decisions based on IHT alone
The new rules are significant, but they do not mean everybody should empty their pension before April 2027.
Withdrawing a large pension could trigger substantial Income Tax, remove valuable tax-free pension growth and leave less money available for retirement.
The right decision depends on:
the size of your pension;
your other assets;
your age;
your retirement income requirements;
who you want to inherit your estate;
and your overall tax position.
The key point
From 6 April 2027, pensions will become much more important when considering Inheritance Tax.
For many people, simply leaving the pension untouched because it sits outside the estate will no longer be an effective estate-planning strategy.
If you have a substantial pension, the sensible starting point is to calculate what your estate would look like after including your pension, then consider whether your Will, pension nominations, gifting strategy and retirement plans still make sense.
Please note that Busy Bee Accountancy does not provide specialist Inheritance Tax or tax advisory services. However, we believe it is important to keep everyone informed about significant changes in tax law so you are aware of issues that may affect you and can seek appropriate specialist advice where needed.
At Busy Bee, we help limited company owners stay compliant, tax efficient and in control of their business finances.
Disclaimer: The content on this page is for general information only and should not be treated as tax, legal or financial advice. Tax planning should always be reviewed against your individual circumstances before action is taken.
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