Pensions and inheritance tax: what's changing in April 2027

For years, one piece of planning wisdom has been near-universal: spend everything else first, leave the pension alone. Unused defined contribution pensions generally sat outside your estate for inheritance tax, so a pension wasn't just retirement income — it was the most efficient inheritance vehicle in Britain.

That era is ending.

What's changing

From 6 April 2027, most unused pension funds and pension death benefits are due to be brought inside the estate for IHT purposes. Broadly, if you die with money still in your pension, that money will count towards your estate alongside your house and savings, and can be taxed at 40% above your allowances.

The existing income tax treatment sits on top: beneficiaries inheriting from someone who dies after age 75 already pay income tax on withdrawals at their own marginal rate. Post-2027, a large pension inherited from an estate over the allowances could suffer IHT and then income tax on what remains — a combined effective rate that can climb beyond 60% for higher-rate beneficiaries. Death before 75 remains more favourable for income tax, but the IHT layer will apply regardless.

There's an important carve-out: funds passing to a spouse or civil partner remain exempt, as with the rest of the estate. The full impact typically lands on the second death.

Who should pay attention

• Anyone who has deliberately preserved pensions while spending ISAs and other assets — the classic decumulation order may now be exactly backwards for some families.
• Estates hovering near the £2 million residence nil rate band taper, where pension values counting towards the estate could newly trigger the loss of the RNRB — a double hit.
• Anyone whose death benefit nominations haven't been reviewed in years. Nominations decide who can receive the money and how; post-2027 they interact with IHT planning and deserve a fresh look.

What the response might look like

Nothing here is one-size-fits-all, but the levers being discussed across the profession include: drawing pension income earlier and gifting the surplus (the "gifts from normal expenditure out of income" exemption becomes even more valuable — see our gifting guide); reconsidering annuities, which convert a taxable pot into income for life; spouse exemption planning across two deaths rather than one; and reviewing whole-of-life insurance in trust to cover the enlarged liability.

What's clearly wrong is doing nothing while assuming the old logic holds. Equally wrong is panicking into irreversible decisions before the final rules are fully bedded in — draft legislation has evolved, and details matter enormously here.

The honest summary

If your retirement and estate plan was built any time before 2025, the IHT assumptions inside it are probably out of date. This is the single biggest reason we're seeing for plan reviews right now — and the families who adjust early will have far more options than those who wait.

This article is for general education only and isn't personal advice. The rules described are based on announced government policy and may be refined before and after implementation — always check the current position. If your pension is a meaningful part of what you hope to pass on, this is worth a proper conversation. Get in touch.