From 6 April 2027, a significant change is expected to bring most unused pension funds into the scope of inheritance tax (IHT).
From 6 April 2027, a significant change is expected to bring most unused pension funds into the scope of inheritance tax (IHT).
For some years now, the value of your pension has generally sat outside of your estate for IHT purposes. That’s made it one of the most tax-efficient ways to pass on wealth, and a key part of your estate planning.
At the same time, inheritance tax is already affecting more families than ever. Receipts reached £7.5 billion in 2023/24, according to HM Revenue & Customs, and are expected to keep rising. Bringing pensions into the equation could widen that net further.
If you’re building or protecting wealth, now is a natural moment to pause and reflect on how your pension fund fits alongside the rest of your estate, and whether your current plan will still help you achieve your goals.
Why pensions have played a key role in estate planning
Pensions have long been a valuable part of estate planning, largely because they’ve typically sat outside your estate for inheritance tax purposes. In simple terms, that’s meant unused pension funds could often be passed on more tax-efficiently than other types of assets.
Because of this, many people think about their pension as more than something to fund their retirement. It’s also something they could leave to a beneficiary as part of their legacy.
As such, a common approach has been to draw income from ISAs, savings or other investments first, leaving pension funds untouched for as long as possible. This allowed your pension to remain invested and, in many cases, to be passed on without forming part of your estate for inheritance tax.
For many families, this hasn’t just been a tactic; it’s become a central part of how they approach both retirement and passing on wealth.
What the 2027 changes could mean for estates
From April 2027, any unused pension funds you leave behind could be included when calculating the value of your estate for inheritance tax purposes.
That’s a significant change. Where your pension may once have sat in the background, it could now play a much bigger role in whether inheritance tax is due, and how much.
This could mean your estate is worth more than you expected once your pension is included. If you’ve built up a sizeable pension, it may push your estate above the inheritance tax threshold or increase an existing liability.
There’s also another layer to be aware of. Depending on your circumstances, the people you leave your pension to could face:
- inheritance tax on the value of the pension
- income tax when they come to draw money from it (typically your pension is tax-free if you die before age 75, but taxed at the beneficiary’s marginal rate if you die aged 75 or over)
Taken together, that could reduce the amount your loved ones ultimately receive, particularly if your pension forms a large part of your overall wealth.
HMRC is already forecasting that more estates will fall within the scope of inheritance tax in the coming years. Changes like this are likely to bring even more families into that position.
Spousal exemption: an important constant, for now
One area where there’s perhaps more certainty is the spousal exemption.
If you leave assets to a spouse or civil partner, they are generally exempt from inheritance tax, and at the time of writing, there’s no indication this will change.
This means your pension could still pass to your spouse without an immediate inheritance tax charge. However, it’s important to think about what happens next.
Once inherited, those pension funds may then form part of your partner’s estate. In other words, the tax may be delayed rather than avoided altogether, which is why taking a longer-term view remains important.
Why it’s time to review your retirement income
These changes might prompt you to rethink how you plan to use your pension in retirement.
Up until now, preserving your pension for as long as possible may have felt like the most efficient approach. From 2027, that might not always be the case.
This could mean taking a more balanced approach, perhaps drawing some income from your pension earlier, rather than relying solely on ISAs or other investments.
What becomes more important is how everything works together. Instead of looking at each asset in isolation, there’s real value in considering how your pension, ISAs and other investments combine to support both your retirement income and what you leave behind.
1. Looking at your assets as a whole
One of the clearest outcomes of these changes is the need for a more holistic approach to financial planning.
Pensions, ISAs, property and other investments have always served different purposes. But as tax rules evolve, the connections between them become more important.
A well-structured plan may help you:
- manage income efficiently throughout retirement
- reduce unnecessary tax exposure over time
- ensure wealth is passed on in line with your intentions
This is where personalised advice becomes particularly valuable, not just to react to rule changes, but to position your finances more effectively for the long term.
2. Reviewing beneficiary nominations and estate plans
Pension benefits are typically distributed based on beneficiary nominations or letters of wishes, rather than through a will. This has historically given pensions a degree of flexibility that other assets don’t always have.
Because of this, you might have nominated children or grandchildren directly, especially as pensions currently sit outside the estate for inheritance tax purposes.
But as the rules evolve, it becomes increasingly important to ensure that:
- your pension nominations reflect your current wishes
- your will and estate plan are aligned
- different assets are distributed in a balanced and considered way
Even small inconsistencies can have unintended consequences, particularly when tax treatment changes.
3. Your estate plan could become more complex
Including pensions within inheritance tax rules could also make things more complex when your estate is being settled.
Your pension may now need to be considered alongside your other assets, which can make the process more detailed for those handling your affairs. For your family, this could mean working more closely with pension providers and navigating decisions they might not have faced before.
A real-life scenario: how this could play out
Imagine a couple who’ve spent years building a comfortable life together. They own a home worth £600,000, have £200,000 set aside in ISAs, and a pension pot of £400,000.
Up until now, that pension may have sat in the background, not counted as part of their estate for inheritance tax. But from 2027, that same pension could suddenly become part of the picture, taking the total value of their estate to £1.2 million.
For them, that could mean:
- moving above the inheritance tax threshold when they hadn’t expected to
- a larger tax bill than planned
- and potentially less of their hard-earned wealth reaching the people they care about
It also highlights something many families are beginning to realise – you don’t necessarily need to think of yourself as “wealthy” to be affected. Rising property values and years of careful saving can add up, and changes like this may bring more people into the inheritance tax net than they ever anticipated.
Every situation will be different, of course. But it’s a useful reminder that what once felt straightforward may now need a closer look, and that pensions could start to play a much more visible role in your overall estate.
Reviewing your plans ahead of 2027
The 2027 reform represents a major shake-up in how pensions are treated for inheritance tax purposes.
Pensions will remain a valuable part of retirement planning, but strategies that once worked well may need to evolve.
A personal review could help you:
- understand how the changes affect your estate
- reconsider how and when you draw income
- ensure your plans reflect both your needs and your family’s future
Get in touch
If you’re unsure how these changes could affect you, you don’t need to figure it out by yourself. An Amber River financial adviser can help you understand what the 2027 changes mean for your specific situation, review your current plans, and explore options that align with your goals.
For qualified and regulated advice, speak to an Amber River financial planner. To set up an initial appointment, 0800 915 0000. Alternatively, you can use our contact form to arrange an appointment.
FAQs
Will pensions be subject to inheritance tax from 2027?
From 6 April 2027, most unused pension funds are expected to be included in the value of an estate for inheritance tax purposes. This means pensions, which were previously outside the estate, could now increase the likelihood of an inheritance tax liability depending on your overall wealth.
Will the spousal exemption still apply to pensions?
Current rules suggest that assets passed between spouses or civil partners will remain exempt from inheritance tax, including pensions. However, once inherited, those pension funds could form part of the surviving spouse’s estate, meaning tax may still apply later.
Will beneficiaries pay tax on inherited pensions?
Potentially yes. Beneficiaries may face inheritance tax on the pension fund and, in some cases, income tax when withdrawing money. The overall tax treatment will depend on individual circumstances, including the age at death and how benefits are taken.
Should I start drawing my pension earlier?
It depends on your situation, but the changes might prompt some people to review how they use their pension. A more balanced approach, drawing from different assets over time, may become more relevant than preserving pensions entirely.
Do I need to update my beneficiary nominations?
It’s worth reviewing them to ensure they still reflect your wishes and align with your wider estate plan. As pensions may now form part of the inheritance tax calculation, consistency across your arrangements becomes more important.
Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
