For decades, the defined contribution pension has been the most IHT-efficient financial vehicle available in the UK. Assets left in a pension wrapper on death passed to nominated beneficiaries free of inheritance tax and — for deaths below age 75 — free of income tax too. This made the pension an almost uniquely attractive estate planning vehicle: the tax-free growth of an ISA combined with the IHT exemption of a trust, accessible from age 55 (rising to 57 from April 2028).
The Autumn Budget of October 2024 announced the end of that arrangement. From April 2027, unused pension funds will be brought within the scope of UK inheritance tax.
This is a genuine structural change to retirement and estate planning, and the implications are significant enough that anyone with substantial pension savings should be reviewing their position now.
What the Change Actually Does
Under current rules (pre-April 2027), defined contribution pension pots pass on death outside the estate for IHT purposes. The pension provider pays the remaining fund to nominated beneficiaries. The beneficiaries then receive the fund free of IHT (at any age of death) and free of income tax if the pension holder dies before age 75. If the holder dies aged 75 or over, the beneficiary pays income tax on any withdrawals at their marginal rate — but there is still no IHT.
From April 2027, unused pension funds will be included in the taxable estate for IHT purposes. The standard IHT nil-rate band (currently £325,000) and residence nil-rate band (up to £175,000 where a family home passes to direct descendants) can still be set against the estate — but the pension fund will form part of the pot that consumes them.
Where the combined estate (including pension) exceeds available nil-rate bands, IHT at 40% will be charged on the excess.
Under the final design enacted in Finance Act 2026, the personal representatives of the estate are responsible for reporting and paying the IHT attributable to unused pension funds (an earlier consultation had proposed collection via the pension scheme itself). HMRC and pension providers are still working through the operational detail of how schemes and personal representatives interact, which is part of why commencement is set for 6 April 2027 rather than immediately.
Who Is Most Affected
Large pension pots relative to the rest of the estate: Someone with £800,000 in a pension and relatively modest non-pension assets faces the sharpest impact. Previously the pension was invisible to IHT; now it is potentially fully taxable.
Individuals who have deliberately not drawn down their pension: The old planning advice was often to spend ISAs and other savings first, leaving the pension untouched as a tax-free legacy. That advice needs revisiting. Drawing down a pension earlier (paying income tax on withdrawals at your marginal rate) rather than leaving it to compound IHT-free may now be sub-optimal — or may not be, depending on comparative rates.
Beneficiaries who are additional-rate taxpayers: Under the old rules, the beneficiary of a pension from a pre-75 death paid no tax at all. Under the new rules, they face both IHT at the estate level (40%) and income tax on withdrawals at their own marginal rate. The combination can produce effective rates above 60% for additional-rate beneficiaries receiving inherited pension income.
Individuals relying on the pension to fund IHT: Some estates were structured with the pension as the asset that would pay the IHT bill on the rest of the estate. That logic is now circular — the pension itself generates an IHT liability.
What Changes Less Than You Might Think
The pension is still tax-efficient during your lifetime: Contributions receive income tax relief at your marginal rate. Investments grow free of tax within the wrapper. These benefits are unchanged.
Spouses and civil partners: The IHT spouse exemption applies to pension assets as it does to other estate assets. Pensions passed to a spouse on first death remain IHT-free. The IHT charge arises on the second death.
Transfers to trusts and charities: The normal IHT rules for trusts and charitable legacies will apply to pension assets as they do to other assets. Pension assets left to a qualifying charity will remain IHT-free. Whether the existing pension trust nomination framework can achieve this efficiently is being worked through in HMRC's consultation process.
The income tax treatment remains unchanged: The income-tax-free treatment for deaths before 75 and the income-taxable treatment for deaths at 75 or over are not changed by this reform.
Planning Strategies to Consider Before April 2027
The change is announced but not yet in effect. That gives a planning window of roughly two years — meaningful, but not indefinite.
1. Draw Down the Pension Earlier Than Planned
If you were planning to leave substantial pension assets untouched until late in life, it may now be more efficient to draw down the pension incrementally — particularly if you can do so at basic or lower tax rates.
For a higher-rate taxpayer drawing pension income above the personal allowance, withdrawals are taxed at 40%. The IHT cost of leaving the pension intact is also 40% (potentially with income tax on top for beneficiaries). The comparison is not straightforward, but for many individuals the pension is no longer automatically the "last resort" asset.
2. Consider a Pension Drawdown Strategy That Uses the Basic-Rate Band
For those with flexibility over when they take pension income (e.g. those who have already retired or taken semi-retirement), drawing pension income each year up to the basic-rate threshold (£50,270 in 2026/27) and investing the after-tax proceeds in an ISA or other wrapper can gradually reduce the pension pot while sheltering the proceeds from future IHT.
This strategy is most effective when executed over a 10–15 year period rather than in a concentrated burst.
3. Life Insurance Written in Trust
One response to the new IHT liability is to take out a life insurance policy — written in trust so that the payout falls outside your estate — sized to cover the expected IHT charge on the pension. Premiums may qualify for the "normal expenditure out of income" IHT exemption if paid regularly from surplus income.
The cost of this approach depends on age, health, and the size of the pension. For individuals in their 50s and early 60s, the premium cost relative to the IHT saving can be highly favourable.
4. Revisit Nomination Letters and Trust Structures
Most pension providers hold pensions under a discretionary trust with a nomination letter that guides (but does not bind) the trustees on distribution. The new IHT rules may change how the IHT liability is calculated and which part of the estate it is charged against. Reviewing nomination letters with this in mind — and potentially updating them to guide trustees on the IHT-efficient distribution of what remains — is sensible planning.
5. Consider Spousal Bypass Trusts
Where a pension is currently nominated to pass to a surviving spouse, the IHT deferral to the second death means the combined estate at that point may be substantially larger. Redirecting some pension assets through a discretionary spousal bypass trust (rather than directly to the spouse) can use additional nil-rate bands and prevent the pension from inflating the second estate to a level that is IHT-inefficient.
This is complex and should be done with specialist estate planning advice. The rules around trusts and pensions in this context are still being clarified by HMRC.
6. Increase ISA Contributions
Given the IHT asymmetry between ISAs and pensions is being partially eroded (ISAs were always in the estate; pensions were not), the relative attractiveness of pension contributions for estate planning purposes is reduced. ISAs remain a clean vehicle for tax-free growth during your lifetime — but they are part of the estate for IHT purposes, just as they always have been. Maximising ISA contributions (£20,000 per year) and investing the proceeds into growth assets within the ISA wrapper allows efficient, tax-free compounding, and reduces the overall tax drag on wealth accumulation.
What Remains Uncertain
The primary legislation has now been enacted — the measure was confirmed in Finance Act 2026, which received Royal Assent on 18 March 2026, bringing unused pension funds within the scope of IHT from 6 April 2027, with personal representatives liable for the reporting and payment. Some operational detail is still being finalised by HMRC. Key open questions include:
- The precise mechanics by which pension schemes will calculate and remit the IHT liability
- The treatment of pension assets where the pension is already in drawdown versus in the accumulation phase
- The interaction with the overseas aspects of the pension regime (QROPS, international pensions)
- Whether the change affects defined benefit pensions as well as defined contribution schemes
Advisers and pension providers are watching the remaining operational guidance closely ahead of the 6 April 2027 commencement.
Compliance Caveat
The pension IHT reform described in this article was announced in the October 2024 Budget and enacted in Finance Act 2026 (Royal Assent 18 March 2026), with effect from 6 April 2027. Some operational detail remains subject to further HMRC guidance, and the rules as applied in practice may differ from the description above. This article is for general information purposes only. The appropriate course of action in your specific circumstances depends on your overall estate, pension size, tax position, family circumstances, and residency. You should seek advice from a qualified financial planner and tax adviser before making any decisions. Pension and inheritance tax rules are subject to change. The value of pensions and investments can fall as well as rise, and you may get back less than you invest.
How Global Investments Can Help
The pension IHT change is exactly the kind of structural shift that benefits from holistic, forward-looking planning rather than reactive adjustment. Global Investments is working with clients now — while there is still time to implement strategies in a structured way — to assess the impact of the April 2027 change on their specific estate and pension position and to develop a plan that optimises the outcome for their family.
This involves reviewing the size and composition of pension pots, modelling different drawdown strategies, assessing the case for life insurance written in trust, and considering whether nomination letters and trust structures remain appropriate. If you have not yet had this conversation, now is the right time. Contact our team to arrange a pension and estate planning review.
This article is for general information only and does not constitute financial, legal or tax advice. Rules, prices and regulations change; verify current requirements with a qualified adviser before acting.