Pensions and inheritance tax: what changes from April 2027

What's changing

At the moment, money left in a defined contribution pension when you die is usually passed to your beneficiaries free of inheritance tax (IHT). It sits outside your estate, which is why advisers have often suggested drawing on other savings first and leaving the pension untouched.

The government announced in the Autumn Budget of October 2024 that from 6 April 2027, most unused pension funds and death benefits will be included in the value of a person's estate for IHT purposes. The rules were refined during 2025, and the responsibility for reporting and paying the tax on the pension element now rests with the personal representatives of the estate, who can direct the pension scheme to pay it from the fund.

Two things don't change. Anything passing to a spouse or civil partner remains exempt, as it does for the rest of the estate. And the income tax rules on inherited pensions stay as they are: if you die after 75, your beneficiaries still pay income tax on what they draw. For some families that means a pension could be taxed twice, once under IHT and again as income.

Who it affects

Anyone whose estate, including their pension, is likely to be worth more than their available allowances. The nil-rate band is £325,000 per person and the residence nil-rate band adds up to £175,000 where a home passes to direct descendants. Both are frozen until 2030. A couple can combine theirs, so the threshold for a married couple leaving a home to children is up to £1 million.

Many people who never thought of themselves as having an inheritance tax problem will now have one: a house that's grown in value, a workplace pension built up over 30 years, and some ISAs. Add the pension to the estate and the total can cross £1 million without anyone having felt wealthy.

What people are doing about it

There's no single answer, and the right one depends on your age, health, income needs and who you want to benefit. The options an adviser will usually walk through include:

• Drawing on the pension earlier. Spending the pension and preserving other assets may now make sense, where before the advice was often the reverse. Income tax on withdrawals still applies, so timing matters.
• Gifting from surplus income. Regular gifts from income you don't need are exempt from IHT immediately, provided they don't reduce your standard of living. Pension income can fund them.
• Lifetime gifts. Larger gifts fall out of your estate after seven years. Starting earlier makes a difference.
• Life cover in trust. A policy written in trust pays out outside the estate and can be sized to meet the expected IHT bill.
• Revisiting beneficiary nominations. Who you nominate, and whether the spousal exemption will apply, now has a tax consequence it didn't before.
• Charitable giving. Leaving 10% or more of the net estate to charity reduces the IHT rate on the rest from 40% to 36%.

What most advisers caution against is acting quickly without a plan. The change is 18 months away, the estate figures involved are often large, and some of the options are hard to undo.

Questions worth asking an adviser

• Roughly what would my estate be worth under the new rules, and what would the bill be?
• Should I change the order in which I draw on my pension and other savings?
• Are my nominations and my will still doing what I intended?
• Is there surplus income I could give away regularly?
• Would life cover in trust be a sensible way to meet the bill?

A review now, while there is time to act, is usually worth an hour of anyone's time. The adviser you speak to should be able to set out the numbers for your own situation and the trade-offs of each option, and tell you plainly if nothing needs to change.