Pensions and Inheritance Tax

Pensions have long been one of the most tax-efficient ways to pass money to the next generation. That is changing, and the difference could matter a great deal for families with sizeable pension savings.

From April 2027, most unused pension funds are set to be counted as part of your estate for inheritance tax purposes. Historically many pensions have sat outside the estate, so this is a significant shift that could bring more families within the scope of inheritance tax.

In this insight, we explain the change, what it could mean, and how to think about planning — cautiously, because the detailed rules are still being finalised.

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Key Takeaways

• From April 2027, unused pension pots are expected to be included in your estate for inheritance tax.
• This reverses a long-standing position where many pensions passed to beneficiaries free of IHT.
• Inheritance tax is charged at 40% on estate value above the available allowances.
• The precise rules are still being confirmed, so avoid rushing into irreversible decisions — this is general information, not advice.

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The Current Position

Under the rules in place before the change, most defined contribution pension pots have been able to pass to your chosen beneficiaries outside your estate. That has made pensions a popular way to leave money behind, because the funds typically escaped the 40% inheritance tax that applies to other assets.

For many people, the advice has been to spend other savings first and leave the pension untouched, precisely because of this favourable treatment.

What is Changing from April 2027

From April 2027, the Government plans to bring most unused pension funds into the value of your estate for inheritance tax. In practice this means:

• Pension pots left unused on death could be added to your other assets when working out whether IHT is due.
• Estates that were previously below the threshold might now exceed it once the pension is counted.
• The long-standing strategy of preserving the pension purely for inheritance reasons may no longer work in the same way.

The standard nil-rate band remains £325,000, with a residence nil-rate band of up to £175,000 where a home passes to direct descendants. Value above the available allowances is taxed at 40%.

Why This Matters

For families with modest estates that stay within the allowances, the change may make little practical difference. But for those with larger pensions, the impact could be meaningful — a pot that would once have passed tax-efficiently might now contribute to an inheritance tax bill.

It also changes the order in which it may make sense to draw on different pots in retirement. The old logic of "spend everything except the pension" is exactly what the change is designed to unwind.

Planning Considerations

Because the detailed rules are still being confirmed and everyone's situation is different, it's wise to be cautious. A few general points worth discussing with a qualified adviser:

• Review your overall estate. Adding the pension to your other assets may change whether inheritance tax is likely to apply. Understanding your allowances, including the residence nil-rate band, is a sensible first step.
• Reconsider the drawdown order. Whether to spend pension or non-pension money first may look different under the new rules.
• Think about lifetime gifting. Gifts made during your lifetime can fall outside your estate if you survive long enough, as explained in our guide to the inheritance tax 7 year rule.
• Keep pension contributions in perspective. Pensions remain highly tax-efficient during your working life. Our guide to making the most of your pension covers the day-to-day benefits that are not affected by this change.

Above all, don't take drastic, irreversible action based on a rule that is still being finalised. Withdrawing a pension early or restructuring your affairs hastily can create tax charges of its own.

A Cautious Approach

This is an area where good advice is valuable. The interaction between pensions, inheritance tax and your wider legacy planning is complex, and the right approach depends on your age, health, family and total wealth. Treat 2027 as a prompt to review your plan, not a reason to panic.

Frequently Asked Questions

Does this affect the State Pension?

No. This change concerns unused private pension funds, not the State Pension, which stops on death (though some spousal entitlements exist separately).

Will all pensions be caught?

The measure is aimed at unused pension funds. The precise scope and any exemptions are being confirmed, so check GOV.UK or take advice for your specific pension type.

Should I withdraw my pension now to avoid this?

Not necessarily — withdrawing can trigger income tax and lose future tax-free growth. This is exactly the kind of decision to discuss with a qualified adviser rather than rush.

When does the change start?

The change is expected to take effect from April 2027. Timing and detail may be refined before then.

This is general information, not personal advice. For your own circumstances, consult a qualified financial adviser and refer to GOV.UK for confirmed rules.