Pensions and Inheritance Tax from April 2027: What to Do Now

For years, a pension was one of the most tax-efficient ways to pass wealth on to the next generation. That ends on 6 April 2027, just over five months from now.

From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of a person’s estate for Inheritance Tax (IHT) purposes. The change was announced in the Autumn Budget 2024 and is now law through the Finance Act 2026.

The Autumn Budget on 28 October 2026 confirmed that the change is going ahead. The government is only making minor technical amendments to how it works. The Budget also left the Inheritance Tax thresholds, the seven-year gifting rule and the gifting exemptions unchanged. With the uncertainty gone, now is the time to plan.

Today, most defined contribution pensions, such as SIPPs, personal pensions and most workplace pensions, normally sit outside your estate for IHT. From 6 April 2027, that changes for deaths on or after that date. If someone dies before 6 April 2027, the current rules still apply, even if benefits are paid out afterwards.

Some benefits stay outside the new rules. These include death in service benefits from a registered pension scheme and dependants’ scheme pensions from a defined benefit arrangement. Pension benefits left to a spouse or civil partner will also continue to be exempt from IHT.

Who is likely to be affected?

You may be affected if your home, savings, investments and pensions together come to more than the IHT thresholds available to your estate.

The standard nil-rate band is £325,000. The residence nil-rate band adds up to £175,000 when your home passes to direct descendants, such as children or grandchildren. Both are frozen until 5 April 2031. Unused allowances can normally pass to a surviving spouse or civil partner, so a couple may be able to pass on up to £1 million without IHT.

One detail that is often missed: the residence nil-rate band is reduced by £1 for every £2 that an estate is worth over £2 million. Once pensions count towards your estate, some families who were comfortably below £2 million may move above it and lose some or all of this allowance.

An illustration

Consider a widowed parent who plans to leave everything to their two children. Their estate includes:

• a home worth £600,000;
• savings and ISAs worth £250,000; and
• an unused pension worth £400,000.

 
Assuming they inherited their late spouse’s unused allowances, the estate has £1 million of thresholds available.

This example is simplified, for illustration only. It ignores gifts, reliefs, debts and other factors that could change the result.

There is another layer to this. If the person dies aged 75 or over, beneficiaries may also pay income tax at their own marginal rate when they withdraw inherited pension money, after the pension has already been counted for IHT.

What it means for your family

The change also affects how an estate is administered. Personal representatives, usually the executors, will be responsible for reporting and paying any IHT due on unused pension funds and death benefits.

If they expect IHT to be due, they can ask pension scheme administrators to withhold 50% of the taxable benefits for up to 15 months and pay the tax directly to HMRC. IHT is normally due by the end of the sixth month after the date of death, with interest charged after that.

In practice, your executors will need a clear record of every pension you hold. A forgotten workplace pension could cause delays, extra paperwork and unexpected bills.

Six steps to take before April 2027

Step 1. List every pension you have

Gather details of all your pensions, including old workplace schemes, personal pensions and SIPPs, along with their latest values. If you’ve lost track of any, the government’s free Pension Tracing Service can help.

Step 2. Work out your full estate value

Add up your home, other property, savings, ISAs, investments and pensions, then take off any debts. Compare the total with the thresholds available to you, including the £2 million taper point.

Step 3. Review who you’ve named to receive your pension

Most schemes ask you to complete a nomination or expression of wish form. Check it’s up to date, particularly after marriage, divorce, bereavement or the birth of grandchildren. The choice of beneficiary may now affect how much tax is paid.

Step 4. Reconsider the order in which you draw your money

Many retirement plans were built around a simple rule: spend other savings first and leave the pension untouched. From April 2027, that approach may no longer be the most tax-efficient for everyone. Drawing more from your pension could raise your income tax bill, so this needs careful modelling rather than a quick decision.

Step 5. Look at gifting

Gifts can reduce the value of your estate. Options include the £3,000 annual exemption, regular gifts made from surplus income and larger gifts that normally fall outside your estate after seven years. Each has rules, and giving too much away could put your own retirement at risk. Cashflow forecasting can show what you can afford to give and still live comfortably.

Step 6. Consider protection and update your will

Some families use life insurance written in trust to help cover a future IHT bill. Make sure your will is current and that your executors know where to find your pension details.

 
What not to do

Six months is enough time to plan properly, so there’s no need to rush. Avoid:

• taking large tax-free lump sums early because of Budget rumours;
• giving away money you may need later;
• moving pensions without understanding charges, guarantees or lost benefits; and
• acting on a single headline without seeing how it fits your whole plan.

Some changes, such as taking a lump sum, can’t easily be undone.

Your April 2027 checklist

• List all your pensions and their current values.
• Trace any pensions you’ve lost track of.
• Calculate your total estate, including pensions.
• Check whether your estate could exceed £2 million.
• Review your pension nomination forms.
• Revisit the order you plan to draw your retirement income.
• Explore gifting you can afford.
• Review your will and any life insurance.
• Tell your executors where to find your pension details.
• Book a review before April 2027.

Put the change in the context of your retirement plan

This change doesn’t affect only what you leave behind. It may also change how you should draw your income while you’re alive. The right answer depends on your income needs, your health, your family and how long your money needs to last.

Our free Planning a Confident Retirement guide covers:

• when you may be able to afford to retire;
• how different retirement income sources fit together;
• annuity, drawdown and blended options;
• ways to strengthen your retirement pot;
• documents needed to start planning; and
• a practical retirement checklist.