Reading time: 5 mins
For years, a pension was one of the smartest ways to pass wealth to your family. Left untouched, it sat outside your estate — free from inheritance tax (IHT) entirely. Advisers routinely recommended spending other assets first and preserving pensions for exactly this reason.
That advice is about to expire.
From 6 April 2027, most unused pension funds and death benefits will be pulled into the value of your estate for inheritance tax purposes. If you’ve built a healthy pension pot with the intention of leaving it to your children or grandchildren — or you’re expecting to inherit one — this is one of the most significant changes to UK estate planning in over a decade, and it’s worth understanding now rather than in 2027.
What’s actually changing
Currently, most defined contribution pensions fall outside your taxable estate when you die. Your beneficiaries can usually inherit the pot with no IHT at all, and if you die before age 75, they can often draw the money completely free of income tax too.
From April 2027, that protection is largely removed. Unused pension funds will be treated as part of the deceased’s estate, taxed at the standard IHT rate of 40% above the available threshold (GOV.UK).
A few categories remain protected: dependants’ scheme pensions paid to a spouse, civil partner or financially dependent child, death-in-service benefits for those still employed, and transfers to a spouse or civil partner, which stay exempt under the standard marital exemption (GOV.UK). Beyond that, though, pensions are being brought firmly into line with the rest of your estate.
Practically, this also shifts responsibility. Your executors (personal representatives) will need to identify every pension you hold, request a valuation within 28 days, and coordinate with pension scheme administrators to settle the tax — which is due six months after death, with interest charged on late payment (GOV.UK). For families with pensions spread across several providers, that’s a meaningfully more complex process than today.
The “double tax” trap
Here’s the part that catches people out. IHT is only half the story.
If you die after age 75, your beneficiaries already pay income tax on pension withdrawals at their own marginal rate. From 2027, that income tax will apply after the pension has already been reduced by inheritance tax — meaning some families could face both taxes on the same money.
The numbers add up quickly. On a £100,000 pension pot, a 40% IHT charge leaves £60,000. If the beneficiary is a higher or additional-rate taxpayer drawing that money as income, a further 45% income tax charge brings the net amount down to roughly £33,000 — a combined effective tax rate of around 67%. That’s before accounting for any other assets in the estate that push more of it above the nil-rate band.
It’s a scenario that’s prompted enough concern that a formal petition was raised in Parliament calling for the reform to be reconsidered (UK Parliament Petitions) — a sign of how significant this shift is for ordinary savers, not just the very wealthy.
Where the thresholds stand today
The core allowances aren’t changing, but they are staying frozen for longer, which quietly pulls more estates into IHT each year as asset values rise.
Both bands were originally due to unfreeze in 2030 but have now been extended and frozen until April 2031.
The nil-rate band remains at £325,000 per person, where it has sat since 2009.
The residence nil-rate band adds up to £175,000 when a home is left to children or grandchildren, tapering away entirely for estates above £2 million.
Combined, a married couple or civil partnership can currently shelter up to £1 million before IHT applies, using both allowances and the transferable spouse exemption.
Add a pension into that picture for the first time, and many estates that previously sat comfortably under the threshold won’t anymore.
What this means if you’re passing on wealth
If you’ve been treating your pension as the “last asset to spend” in retirement — drawing down savings and ISAs first to preserve the pension for your family — it’s worth revisiting that strategy well before 2027. Depending on your circumstances, options worth discussing with an adviser include drawing more from pensions during your lifetime rather than preserving them, making full use of annual and lifetime gifting exemptions while assets are still outside your estate, reviewing how life insurance policies are structured (written in trust, they typically sit outside the estate and can help cover a future IHT bill), and updating wills and expression of wishes forms to reflect the new rules, particularly around who is named as a dependant.
What this means if you’re expecting to receive an inheritance
If you’re likely to inherit a pension from a parent or family member, it’s equally worth having the conversation now rather than after the event. Understanding whether the pension holder plans to draw it down, gift from it, or restructure their estate can materially change what actually reaches you — and when it’s taxed twice, as shown above, the difference between good and poor planning can be tens of thousands of pounds.
The bottom line
This isn’t a reason to panic, but it is a reason to plan properly and early. The rules don’t take effect until April 2027, which gives families real time to review pensions, gifting strategies and wills before the changes land — but that window is narrowing, and the right approach depends entirely on your specific assets, beneficiaries and family circumstances.
At Jermyn & Co Chartered Accountants, we help clients plan ahead of changes like this — structuring pensions, gifts and estates to reduce inheritance tax exposure fully within the rules, well before deadlines force rushed decisions. If you’d like to understand how the 2027 changes affect your own estate, we offer a free initial consultation to talk through your position with no obligation.
This article is for general information only and does not constitute financial or tax advice. Rules may change before April 2027; speak to a qualified adviser about your specific circumstances.