What happens to mum and dad’s pension when they die?

Since 2015, pensions have often been one of the most tax-efficient ways to pass on wealth.

If untouched at death, pension funds could usually be transferred to beneficiaries free from Inheritance Tax (IHT). And if someone died before the age of 75, those funds could be drawn free of income tax.

From April 2027, the protection from IHT disappears. The full value of any unused pension benefits will be added to the estate on death and taxed at 40% on the portion above the available allowances.

If the person dies after age 75, beneficiaries may also pay income tax when they draw money from the inherited pension, creating the potential for double taxation without careful planning.

It’s a change that could catch many families out. Rising house prices and healthy pension pots have already pushed many estates beyond the point where IHT becomes a real issue – typically once total assets exceed around £1 million for a couple, depending on how allowances are used.

The government estimates that around 4.6% of UK deaths currently result in an inheritance tax charge. But with most unused pension funds being drawn into estates from April 2027, an estimated 10,500 additional families are expected to face IHT each year.

Use the Inheritance Tax (IHT) Calculator to estimate your Inheritance Tax bill.

This isn’t just an issue for the ultra-wealthy.

Even a typical couple who’ve owned their home for decades, built up two reasonable pensions, and saved consistently, could easily find themselves above the tax threshold.

IHT currently applies to estates over £325,000 per person, or £650,000 for a couple, with an additional Residence Nil Rate Band of up to £175,000 each if a main home is left to children or grandchildren.

But once an estate exceeds £2 million, that extra allowance starts to taper away, meaning more of the estate becomes taxable.

With pensions now joining the calculation, far more families will be affected.

For adult children, the 2027 reform creates an important, if slightly uncomfortable, opportunity to start the conversation about family wealth and legacy.

Talking about money with parents can feel awkward or even inappropriate, but silence can be costly. Many parents may not realise how the tax system is changing, or that inaction could hand a significant portion of their estate to the taxman rather than their loved ones.

A gentle, open-ended question can help start the conversation:

“Have you heard that pensions will soon count towards inheritance tax? It might be worth checking how it affects your plans.”

That one discussion could make the difference between a well-protected family legacy and an avoidable tax bill.

If your parents’ total assets are likely to exceed the IHT threshold, professional advice can help them take action before the new rules take effect.

Every family’s circumstances are different, but financial planners often explore strategies such as:

• Spend it – drawing income earlier from pensions
  Using pension funds more actively during retirement can reduce the eventual tax exposure, while providing a more enjoyable lifestyle now.
• Make regular gifts
  Smaller, consistent gifts from surplus income can gradually reduce the size of the taxable estate without impacting financial security.
• Larger lifetime gifts
  Gifts made more than seven years before death usually fall outside the estate for IHT purposes, giving families a longer window for planning.
• Insurance in trust
  A whole-of-life policy written in trust can be used to cover any anticipated IHT bill, so the estate itself remains intact.
• Reviewing investment structures
  Certain investments or trusts may qualify for tax relief after a minimum holding period, though they carry higher risk and require careful advice.

There isn’t a one-size-fits-all solution, but the earlier you act, the greater the flexibility you’ll have to make thoughtful, tax-efficient choices.

Whether that means adjusting how pensions are used, setting up a gifting plan, or exploring protective strategies, the key is to start the conversation and seek guidance from a qualified independent financial planner who can model different scenarios and explain the trade-offs.

Inheritance planning isn’t just about tax. It’s about ensuring your parents can live comfortably, fund future care if needed, and still pass on what they wish to the next generation.

It’s common for older generations to hesitate – to see their wealth as something to preserve for others, rather than enjoy themselves.

But careful planning allows for both: a fulfilling retirement and a well-protected legacy. By looking at the full picture, including income, assets, care needs, and family goals, families can make decisions that balance today’s comfort with tomorrow’s security.