Using Pensions for Inheritance Tax Planning (Post-2027 Changes)

For over a decade, pensions — particularly Self-Invested Personal Pensions (SIPPs) and defined contribution pension pots — were one of the most powerful vehicles for inheritance tax (IHT) planning available to UK individuals. The fundamental attraction was simple: pensions sat outside the estate for IHT purposes. In the right circumstances, an individual could accumulate millions in a pension, draw on it for income during their lifetime, and pass any remaining funds to their heirs free of IHT on death.

This era is coming to an end on 6 April 2027, when the government brings most unused pension funds within the scope of UK IHT for the first time. The reform — enacted in Finance Act 2026, which received Royal Assent on 18 March 2026 — fundamentally changes the role of pensions in estate planning, but does not eliminate it. Understanding exactly what changed, what options remain, and how to restructure planning for the new environment is essential for every UK national with a significant pension.

The Pre-2027 Position

Before April 2027, the broad position was:

• Defined contribution pensions (SIPPs, workplace money purchase pensions): not part of the deceased's estate for IHT purposes. Beneficiaries nominated by the member received the pension pot free of IHT, though subject to income tax on withdrawals if the member died aged 75 or over.
• Defined benefit pensions: generally no lump sum available outside IHT scope, though spouses' pensions under final salary schemes passed free of IHT.

The result was that well-advised individuals were encouraged to draw on other assets first (ISAs, general investment accounts, rental income), preserve the pension pot as a tax-efficient legacy, and nominate beneficiaries to receive it on death.

The April 2027 Changes

From 6 April 2027 (as announced in the Autumn Budget 2024 and enacted in Finance Act 2026), unused defined contribution pension funds will form part of the deceased's estate for IHT purposes.

The key features of the new regime:

• IHT on unused pension funds: the value of undrawn pension funds at the date of death is included in the estate and subject to IHT at 40% (or 36% where the charitable legacy reduction applies) after deduction of the available nil rate band.
• Administration: 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 pension assets (an earlier consultation had proposed that pension scheme administrators would account for the tax). The mechanics of how schemes and personal representatives interact are still being finalised by HMRC ahead of the 6 April 2027 commencement.
• Income tax interaction: beneficiaries who inherit pension funds will still be subject to income tax on withdrawals from the inherited pension if the member died aged 75 or over (the existing rules). If the member died before 75, withdrawals are tax-free. The combined IHT and income tax burden on inherited pension assets for a member over 75 can therefore be very significant — potentially 40% IHT followed by 45% income tax on withdrawals, creating an effective rate exceeding 60% on the same pension fund.
• Protected death benefits: the treatment of enhanced death benefits, guarantee periods, and annuity income is subject to specific rules that require professional review.
• Overseas pensions: qualifying recognised overseas pension schemes (QROPS) and other overseas pension arrangements may have different treatment depending on the specific scheme rules and the jurisdiction.

What Remains Outside the Estate

Not all pension-related assets are brought within the IHT net:

• Spouse's pension (defined benefit): a surviving spouse's continuing pension income from a final salary scheme is not a lump sum payment and does not form part of the estate.
• Certain annuities: annuities that have been purchased (i.e. the pension has been converted into an annuity) are not estate assets — the annuity income typically ceases on death or converts to a reduced spouse's pension. No lump sum passes to the estate.
• Dependants' drawdown: where pension funds are already in drawdown in the name of a beneficiary (inherited drawdown), these are subject to their own rules rather than the estate provisions.
• Pension scheme discretion: pension trustees retain their discretion over who receives death benefits, and the nomination of beneficiary by the member is generally followed. The IHT reform does not remove this discretion — it just ensures the value is counted for IHT before distribution.

The Impact on Estate Planning Strategies

The 2027 reform has substantially changed the estate planning calculus for individuals with significant pension assets:

Pensions Are No Longer Free of IHT

The strategy of accumulating maximum pension assets as an IHT-free legacy no longer works. Pensions still have substantial benefits — tax relief on contributions, tax-free growth, flexible drawdown — but they are no longer a separate, IHT-exempt asset class.

Re-Evaluating Asset Drawdown Order

Pre-2027, the received wisdom was to spend non-pension assets first and preserve the pension for heirs. Post-2027, this logic is partially reversed. Whether it is better to draw from the pension or from other assets depends on:

• The relative IHT position of pension vs non-pension assets.
• Income tax rates on pension withdrawals.
• Whether other assets benefit from IHT reliefs (BPR, APR, gifts, trust planning) not available to pensions.
• The overall size of the estate and the nil rate band available.

For many individuals, the optimal approach will be to draw the pension more actively during lifetime — reducing the pension fund subject to IHT — while retaining assets that have either IHT reliefs or that can be given away in PETs.

Accelerated Pension Withdrawals

Withdrawing more from the pension during lifetime (and potentially gifting the after-tax proceeds, subject to the seven-year rule) may be more efficient than accumulating a large pension pot. The income tax on pension withdrawals is payable at the marginal rate; the comparison is:

• Option A: Leave £500,000 in pension → IHT on the £500,000 at death at 40% = £200,000 tax; beneficiaries receive £300,000 subject to income tax if member died over 75.
• Option B: Withdraw £500,000 from pension → pay 40% income tax = £200,000 tax, gift £300,000 as PET, survive seven years → £300,000 outside estate with no further IHT.

The numbers are illustrative; the right approach depends on the full picture. For higher-rate and additional-rate taxpayers, the income tax on withdrawal is 40% or 45%, making withdrawal expensive in the short term but potentially more efficient in the long run if IHT can be avoided through gifting.

The Continued Case for Pension Contributions

Despite the IHT reform, pension contributions remain highly tax-efficient:

• Income tax relief on contributions: up to 45% relief for additional rate taxpayers.
• Employer contributions: outside the income tax net for the employee at the point of contribution.
• Tax-free growth within the pension wrapper.
• 25% tax-free cash on commencing benefits (subject to the lump sum allowance).
• No CGT within the pension.

Pensions are still among the most tax-efficient savings vehicles for retirement income. The IHT reform changes their role as a legacy vehicle, not their fundamental attractiveness for retirement saving.

Pension Nomination and Trust Planning

The nomination of beneficiaries should be reviewed in light of the 2027 changes. Key considerations:

• Nominating a spouse: pension assets passing to a spouse remain covered by the spouse exemption from IHT (under current rules), reducing the immediate IHT charge. However, the pension then forms part of the spouse's estate.
• Nominating a charity: pension assets passing to a qualifying charity are exempt from IHT, and the charitable legacy reduction (36% IHT rate) may apply if the total charitable legacy is at least 10% of the net estate.
• Nominating a trust: pension assets paid into trust are subject to specific trust IHT rules depending on the trust type. Professional advice is needed on the interaction of pension death benefits with trust structures in the post-2027 environment.

Defined Benefit Schemes

For defined benefit (final salary) pension members, the IHT implications are different:

• A spouse's pension (survivor's benefit) is typically not an estate asset.
• A lump sum death benefit may form part of the estate depending on scheme rules and any guaranteed period.
• The interaction of DB scheme rules with the IHT reform varies between schemes; scheme administrators should provide individual calculations.

QROPS and Overseas Pensions

For UK nationals who have transferred pensions to QROPS (Qualifying Recognised Overseas Pension Schemes), the IHT position depends on the specific scheme, the jurisdiction, and the timing of the transfer. HMRC has not yet published full guidance on all overseas pension variations. UK nationals with QROPS arrangements should take specialist advice to understand their post-2027 position.

Practical Planning Steps for 2026 (Pre-Implementation)

Although the new rules take effect from 6 April 2027, planning should be actively reviewed now:

1. Value the pension: get current pension fund statements, including any defined benefit transfer values, to understand the magnitude of the IHT exposure.
2. Model the combined estate: add the pension to the overall estate and recalculate the IHT liability under the new rules.
3. Review drawdown strategy: with a financial planner, model whether increasing pension withdrawals (and using the proceeds for spending or gifting) is more efficient than accumulating.
4. Update nominations: review all pension nomination forms to ensure they reflect the post-2027 strategy, not the pre-2027 approach.
5. Consider contributions: the IHT reform changes the estate planning role of pensions but not their income tax efficiency. Contributions should be reviewed in this context.
6. Coordinate with life assurance: if the pension now forms part of the IHT estate, the residual IHT liability after pension drawdown planning may require additional life assurance coverage.

How Global Investments Can Help

The April 2027 pension IHT reform is one of the most significant changes to UK estate planning in a generation. At Global Investments, we are actively reviewing clients' estate plans in light of these changes — assessing pension exposure, modelling revised drawdown strategies, updating nominations, and integrating pension planning with the broader estate structure.

For UK expats, the interaction of UK pension IHT rules with the tax system of the country of residence adds further complexity. We coordinate with local advisers to ensure the revised UK pension strategy does not create unintended liabilities elsewhere.

We help clients to:

• Quantify the IHT exposure on pension assets under the new rules.
• Model optimal drawdown vs accumulation strategies in the post-2027 environment.
• Review and update beneficiary nominations to reflect the new landscape.
• Integrate pension planning with trust, gifting, and life assurance strategies.
• Advise on QROPS and overseas pension arrangements.

The post-2027 pension landscape requires a fresh look at estate planning for virtually every UK national with a significant pension. Do not assume that structures designed for the pre-2027 rules are still optimal. Tax treatment depends on individual circumstances; rules continue to change and all figures in this guide are as of 2026. Please seek professional advice tailored to your situation.