Pensions and Inheritance Tax From April 2027: Why Planning Ahead Matters Now
From April 2027, most unused pension funds will be brought within the scope of Inheritance Tax on death. What's changing, who's affected, and what to consider before then.
Quick answer
For years, unused defined contribution pension funds have generally sat outside a person's estate for Inheritance Tax purposes, making "don't touch the pension, spend other savings first" a common piece of later-life estate planning advice. From April 2027, that position changes: most unused pension funds and certain death benefits will be brought within the value of the estate, meaning many households that assumed their pension would pass on IHT-free need to revisit that assumption well before the change takes effect.
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Inheritance tax calculatorWhy this matters more than it might first appear
The change doesn't just affect very wealthy estates. Because the nil-rate band (Β£325,000) and residence nil-rate band (Β£175,000) are frozen, and because pension pots have grown significantly under auto-enrolment and years of steady contributions, a meaningful number of moderately-sized estates that previously expected to fall below the IHT threshold β or close to it β could find themselves newly liable, or liable for more, once pension value is added back into the calculation.
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Pension calculatorTwo taxes, not one, on the same pot
It's worth being clear that Inheritance Tax and Income Tax are separate questions that can both apply to the same pension death benefit. The income tax position on pension death benefits has long depended on whether death occurs before or after age 75, among other factors β a change to the IHT treatment doesn't automatically change those income tax rules, so the combined effect on a beneficiary needs to be worked through rather than assuming one tax change tells the whole story.
uk-iht-7-year-ruleRethinking the order of withdrawals
A common piece of estate planning built around the old rules was to draw down other assets β ISAs, savings, investment portfolios β first in retirement, and leave pensions untouched for as long as possible, precisely because pensions sat outside the estate. Once pensions are brought into scope, that strategy needs revisiting on a case-by-case basis: for some households it may still make sense to prioritise other assets for cash-flow or income tax reasons, but the automatic IHT advantage that used to justify "save the pension for last" will no longer apply in the same way from April 2027.
Bottom line
This is a genuinely significant change to UK estate planning, not a minor technical adjustment β anyone with a meaningful pension pot, particularly alongside other assets that could push an estate towards or over the IHT thresholds, should get an updated estate plan reviewed well before April 2027 rather than waiting until the rules are already in force.
Sources
- gov.uk: Inheritance Tax
- HM Treasury: Autumn Budget β pensions and Inheritance Tax
- gov.uk: Tax on your private pension contributions
Frequently asked questions
What is changing to pensions and inheritance tax from April 2027?
From April 2027, most unused defined contribution pension funds and death benefits will be brought within the value of a person's estate for Inheritance Tax purposes, reversing the long-standing position where pensions generally sat outside the estate on death.
Why do pensions currently sit outside the estate for IHT?
Historically, pension freedoms reforms encouraged people to leave pensions largely untouched and pass them on to beneficiaries free of Inheritance Tax, since unused defined contribution funds were typically excluded from the estate β a position that made pensions an attractive vehicle for later-life estate planning.
Who is likely to be most affected by the change?
People with larger pension pots relative to their other assets, particularly those who have deliberately run down other savings and left pensions untouched as an IHT planning strategy, are most likely to see a meaningful increase in the IHT payable on their estate once the change takes effect.
Will pension death benefits still be free of income tax in some cases?
The income tax treatment of pension death benefits (which currently depends heavily on whether death occurs before or after age 75) is a separate question from the Inheritance Tax treatment β both taxes could potentially apply to the same pension pot, so the interaction between them needs careful review, not just the headline IHT change alone.
Should pension withdrawal strategy change now, ahead of April 2027?
Many advisers suggest revisiting the order in which different assets are drawn down in retirement β for example, spending taxable savings before pensions rather than the other way around β but any change should be considered individually, since drawing down a pension faster has its own tax and cash-flow consequences.
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Related reading
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