Pensions and Inheritance Tax: The April 2027 Change

For years, pensions have sat largely outside the inheritance tax net. Unused pension funds could often be passed to beneficiaries free of inheritance tax, which made the pension a quietly effective way to transfer wealth. From April 2027 that position changes: most unused pension funds are expected to come within the scope of inheritance tax. For anyone who has been treating their pension as an estate-planning asset, this is a change worth understanding well before it takes effect.

This article explains the change and why it matters for the way estates are structured. It is part of our guide to Wills and Estate Structuring. For advice on how your own pension and estate fit together, our wills and estate structuring service at /services/wills-and-estate-structuring can put a plan in place for you.

How pensions have been treated

Under the current treatment, most defined contribution pension funds that have not been drawn down can be passed to nominated beneficiaries when the pension holder dies, generally without an inheritance tax charge on the fund itself. The income tax position for the beneficiary depends on the age at which the pension holder died. The result has been that a pension could be left untouched, with other assets spent first, precisely because the pension passed on so efficiently.

This created a planning pattern: spend the taxable estate, preserve the pension. That pattern is what the April 2027 change is designed to address.

What changes from April 2027

From April 2027, most unused pension funds are expected to be brought within the value of a person's estate for inheritance tax purposes. In other words, the pension fund would be added to the rest of the estate and could be taxed at the standard inheritance tax rate to the extent the estate exceeds the available thresholds. The detail of how this is administered, and exactly which pension types and death benefits are caught, is being finalised, so the precise mechanics should be confirmed closer to the time.

The headline, though, is clear: the pension can no longer be assumed to pass free of inheritance tax. For larger estates where the pension is substantial, this can be a meaningful additional liability.

Why this matters for estate structuring

The change undoes a piece of conventional wisdom. Where the advice used to be to draw on other assets and leave the pension intact, the calculation now has to take account of the pension being inside the estate. This affects the order in which assets are spent in retirement, how income is drawn, and how wills and beneficiary nominations are set up.

• The order of spending in retirement may need to change, since preserving the pension no longer automatically shelters it from inheritance tax.
• Beneficiary nominations on pensions should be reviewed alongside the will, so the two work together rather than at cross purposes.
• The interaction between the pension, the nil-rate bands, and any charitable giving needs to be looked at as a whole.
• For couples, the spouse exemption and the order of deaths affect how the pension is taxed.
• Lifetime gifting and the seven-year rule may become more relevant for those who would previously have relied on the pension.

A simplified illustration

Consider a single person with a £600,000 estate outside their pension and a £400,000 unused pension fund, leaving everything to a child. Under the old treatment, the pension passed outside inheritance tax and only the £600,000 estate was assessed against the thresholds. Under the expected post-2027 treatment, the pension is added in, giving a £1,000,000 estate to assess.

The figures are illustrative and ignore the specific thresholds and reliefs that would apply, which is exactly the kind of detail a specialist would build into a proper calculation. The point is the direction: the assessed estate grows once the pension is counted.

What to consider now

The change has not yet taken effect, so the priority is to understand the position rather than to make hasty decisions. Reviewing how the pension sits within the wider estate, checking that wills and nominations are consistent, and modelling the likely effect are all sensible steps that do not commit you to anything. Knee-jerk reactions, such as drawing down a pension early without considering the income tax cost, can do more harm than good.

Common questions

Is the April 2027 change definite?

The direction of travel is clear: unused pensions are expected to come within inheritance tax from April 2027. The precise mechanics are being finalised, so the detail should be confirmed nearer the time. Planning should be based on understanding the change, not on assuming it will be reversed.

Should I take money out of my pension now?

Not without careful thought. Drawing a pension down can trigger income tax and may not improve the overall position. The right answer depends on your full circumstances, which is why this is worth modelling with a specialist rather than deciding on instinct.

How does this affect my will?

Your will and your pension nominations need to work together. If the pension is now part of the taxable estate, the way the will distributes the rest of your assets, and uses the available thresholds, may need revisiting. Reviewing both at once is the sensible approach.