Pensions and inheritance tax: what changes in April 2027 and what to do now

For decades, defined contribution pension pots have sat outside the taxable estate for inheritance tax purposes. This made them one of the most powerful estate planning vehicles available to UK taxpayers, money that could be passed to beneficiaries free of IHT, often free of income tax if the policyholder died before 75.

That changes in April 2027.

The October 2024 Autumn Budget announced that most unused pension funds and death benefits will be brought within the scope of inheritance tax. Official guidance confirms that the change applies from 6 April 2027. [1]

Note: This article reflects the position as announced in October 2024 and confirmed in subsequent government guidance. Readers should verify current HMRC guidance before making planning decisions, as regulations may have been refined during implementation. [1]

The current position

Under the pre-2027 rules, most defined contribution pension pots (including SIPPs and workplace money purchase schemes) do not count as part of your estate for IHT. This means a person with a £1 million pension pot, a £500,000 property, and £200,000 in ISAs has a taxable estate of only £700,000, with the pension entirely excluded.

Many estate planners have structured wealth specifically around this advantage: draw on other assets first, preserve the pension as an IHT-free inheritance for children.

What changes from April 2027

From 6 April 2027, most unused pension funds and death benefits will be treated as part of the deceased's estate for IHT purposes. Personal representatives will be responsible for reporting and paying any inheritance tax due on unused pension funds and death benefits. [1]

The practical impact is significant. Using the example above, from April 2027 the total taxable estate becomes £1.7 million, with IHT potentially due on the portion above available allowances. For a single person with allowances of £500,000, that's a taxable estate of £1.2 million and an IHT bill of £480,000, largely driven by a pension pot that was previously outside scope.

Death in service benefits payable from registered pension schemes and dependant's scheme pensions from defined benefit arrangements remain outside the scope of the pension IHT change. Benefits paid to a surviving spouse, civil partner, or registered charity are also exempt from IHT. [1]

Who is most affected

The change disproportionately affects:

• People with large pension pots who planned to leave them intact, particularly those who preserved pension wealth expecting IHT-free transfer
• Retirees drawing from other assets first, a common strategy now significantly less tax-efficient
• Business owners with personal pensions alongside business assets already subject to reliefs
• Widows and widowers who may have inherited a spouse's pension

Planning options: what to do now

1. Accelerate drawdown and gifting Drawing down pension funds and making structured gifts to family members starts the seven-year clock on potentially exempt transfers. Gifts made before April 2027 may clear the seven-year window before a significant estate planning review is due.

2. Use pension income for normal expenditure out of income gifting Regular gifts from income that form part of your normal expenditure are immediately exempt from IHT, no seven-year wait required. If your pension generates income you don't need to live on, this exemption is highly valuable.

3. Fund life insurance in trust A life insurance policy written into a qualifying trust sits outside the estate and can be used to cover the anticipated IHT liability. Pension drawdown funds can be used to pay premiums.

4. Review pension nominations While nominations do not override IHT treatment under the new rules, trustees of pension schemes retain discretion over death benefit payment. Keeping nominations current ensures the right people are considered.

5. Explore discounted gift trusts and loan trusts These structures allow assets to be moved outside the estate while retaining access to income (discounted gift trust) or a debt repayment (loan trust). They are not pension-specific but become more relevant as pension funds are brought into scope.

6. Review the overall estate plan The change in pension treatment may alter the optimal order of asset drawdown, the structure of your will, and the role of trusts in your planning. A comprehensive review now, rather than closer to April 2027, gives time to implement structures properly.

The timing risk

Pension trustees and professional advisers are already experiencing increased demand. Structures such as trusts, FICs, and insurance policies take time to establish correctly, legal drafting, trustee selection, HMRC registration, and investment setup all have lead times. Anyone relying on last-minute implementation in early 2027 risks poor execution or being unable to complete planning before the deadline.

The advice from professional estate planners is consistent: if your pension forms a material part of your expected estate, act in 2026.

Frequently asked questions

Will defined benefit (final salary) pensions also be affected? The rules primarily target defined contribution schemes. Defined benefit schemes have different mechanics, but death benefits (such as lump sum payments) may be caught. Dependant's scheme pensions from defined benefit arrangements remain exempt. Specialist advice is essential for those with significant DB benefits.

Does the change affect pensions already in payment? The legislation targets unused pension funds and death benefits. Once pension funds have been drawn and are held personally, the normal estate rules apply to those assets. [1]

What if I die before April 2027? The change applies from 6 April 2027. Estates where death occurs before that date are not affected, and pensions remain outside the estate under current rules.

Can I simply take all my pension now to avoid the change? Taking a large pension lump sum has immediate income tax consequences (taxed at your marginal rate) and may be more costly than planning around the IHT change. The decision requires careful modelling of both tax positions.

Is this change definitely happening? The October 2024 Budget announcement has been followed by official government guidance confirming the 6 April 2027 start date. Readers should verify the current status with a specialist adviser or via current HMRC guidance. [1]

This article provides general information only and does not constitute personal financial or tax advice. Rules described reflect confirmed legislation for April 2027. Tardi Group recommends seeking professional advice to assess your specific circumstances.