Pensions and Inheritance Tax from April 2027: Planning Before the Change

For most of the past decade, pension funds have sat entirely outside the UK estate for inheritance tax purposes. This made the pension — particularly after the LTA abolition — arguably the most tax-efficient wealth accumulation and transfer vehicle in the UK tax code. Funds could grow unconstrained, pass to beneficiaries free of the 40% IHT charge, and cascade through generations via inherited drawdown.

That advantage has a deadline. The October 2024 Budget announced that pension funds will be drawn into the estate for IHT purposes from 6 April 2027, and this was subsequently enacted in the Finance Act 2026 (Royal Assent March 2026). The change is now law, not a proposal.

This is a fundamental shift. Those with substantial pension funds — particularly those who had specifically funded their pension as a tax-efficient bequest vehicle — need to reassess their strategy before April 2027.

What Is Changing

Under the current rules (applicable until 5 April 2027), pension funds held in registered pension schemes are classified as "excluded property" for IHT purposes. They do not form part of the deceased's estate when calculating whether the nil rate band has been exceeded, and the 40% IHT charge does not apply to them.

From 6 April 2027, under the Finance Act 2026, pension funds will be included in the deceased's estate for IHT. The standard IHT framework will apply:

• A nil rate band (NRB) of £325,000 applies per person
• A residence nil rate band (RNRB) of up to £175,000 applies where a main residence passes to direct descendants (but tapers for estates above £2 million)
• The spousal exemption continues to apply — transfers between spouses and civil partners are exempt from IHT regardless of value; pension funds passing to a registered charity are also exempt
• Amounts above the available allowances are taxed at 40%

The change means that a person with a £400,000 property, £200,000 in ISAs and investments, and a £600,000 pension currently has a taxable estate of £600,000 (property + investments). From 2027, the estate would be £1,200,000 including the pension — potentially subject to significant IHT depending on the nil rate bands available.

Who Is Affected

The change is most significant for:

Those who used the pension specifically as a wealth transfer vehicle. Since the 2015 Pension Freedoms, many financial planners recommended keeping pension funds intact as long as possible precisely because they passed outside the estate. If you are living on other assets (ISAs, investment accounts, property sale proceeds) to preserve your pension for your children, the rationale for that strategy requires reassessment.

Those with large pension pots and modest other estates. If the total estate (including pension) would have been below the nil rate band anyway, the change makes no practical difference. But where the combined estate — once the pension is included — exceeds available allowances, the pension creates a new IHT exposure.

Those with complex family situations. The spousal exemption continues to apply, so transfers between married couples and civil partners remain IHT-free. But on the second death, the full estate including any inherited pension is in scope. Blended families, unmarried couples, and those with significant pension entitlements and modest nil rate bands face the sharpest impact.

DB scheme members. Defined benefit death benefits are treated differently from DC drawdown pots under the enacted rules. Death-in-service lump sums payable from a registered pension scheme remain outside the IHT charge, and a dependant's scheme pension (regular income) from a DB scheme is also outside scope. Only unused DC funds and certain lump sum death benefits are caught.

The Administration Mechanism

Under the current process, the personal representatives (executors) of the estate deal with HMRC and pay the IHT from the estate's assets before probate is granted. Pension funds currently sit outside the estate — they pass directly from the scheme/provider to beneficiaries, bypassing the estate entirely.

An earlier consultation proposal would have made pension scheme administrators calculate and pay the IHT on the pension element before releasing funds. That approach was dropped in the final legislation. Under the enacted Finance Act 2026 rules, the deceased's personal representatives are responsible for reporting and paying the IHT due on unused pension funds, in the same way as for other estate assets. Beneficiaries can, if they wish, direct the pension scheme to settle their share of the IHT from the pension funds, so that they are not left funding the charge from elsewhere.

Spousal Transfers and the Second Death

The spousal exemption means that pensions and other assets passing between spouses (and civil partners) on first death remain IHT-exempt under the 2027 framework. The IHT exposure crystallises on the second death.

For couples where both partners have pension funds, the combined pension wealth is relevant for the second death estate. A couple each with £400,000 in pension passes each pot to the survivor on first death (IHT-exempt). On the survivor's death, the combined pension of £800,000 is now in the estate — alongside property and investments.

The interaction of the transferable nil rate band (the unused NRB from the first death transfers to the survivor's estate, potentially doubling it to £650,000) and the RNRB with the pension calculation requires careful estate modelling. Some estates that appeared comfortable under current rules will face unexpected IHT from 2027.

Practical Planning Actions Before April 2027

1. Model your total estate including pension. Commission a full estate audit that includes the current value of all pension funds alongside other assets. For DB scheme members, use the capital value of the DB pension (typically 20 times the pension for IHT modelling purposes). Where does the total stand relative to your available nil rate bands?

2. Reassess whether to draw down the pension. If the pension is going to be in the IHT net from 2027, the tax cost of leaving it untouched increases. Drawing pension income now — and paying income tax at your marginal rate — may result in a lower total tax bill than leaving it to accumulate and face 40% IHT plus income tax on withdrawal by beneficiaries.

The optimal drawdown rate depends on marginal income tax rate, expected estate size, and beneficiary tax rates. This requires individual modelling.

3. Consider redirecting spending. Under the current rules, many planners advised clients to spend ISAs, investment accounts, and property first — preserving the pension as the last asset, because it passed outside the estate. From 2027, this logic inverts for those whose estate will be IHT-liable. It may be more efficient to spend the pension first (paying income tax but not IHT) and preserve ISAs (which are not subject to income tax on withdrawal by beneficiaries).

4. Use gifting strategies before April 2027. Lifetime gifts can remove assets from the estate. The annual gifting exemption (£3,000 per donor per year), larger potentially exempt transfers (which become exempt after seven years), and charitable donations are all relevant tools. These gifts should be from taxable assets rather than the pension, but they reduce the overall estate.

5. Review pension nominations. If your pension is going to be in the IHT net, the identity of the beneficiary starts to matter for IHT purposes. Spouses and civil partners receive pension funds free of IHT (spousal exemption). Non-spouse beneficiaries will be subject to IHT on their share. Update nominations in light of this change.

6. Consider QROPS timing. For UK expats genuinely settled overseas, a QROPS held in an overseas scheme may not be subject to the same UK IHT treatment as a registered UK pension, depending on the member's residence position. This is a significant and complex decision requiring detailed cross-border analysis. For those who have not yet transferred to a QROPS, the timing of the decision — before or after April 2027 — may matter.

What Is Not Changing

The following are not changing under the April 2027 reforms:

• The spousal exemption (spouse-to-spouse pension transfers remain IHT-exempt)
• Income tax on pension withdrawals (the pension wrapper still defers income tax until withdrawals are made)
• The Lump Sum Allowance and annual allowance rules
• The ability to make pension contributions and receive tax relief

The pension does not become a bad savings vehicle overnight. The income tax advantages — 40-45% tax relief on contributions, tax-free growth, tax-deferred withdrawal — remain. It is specifically the IHT-exemption of the accumulated fund that is being removed.

Compliance Note

This article is for general information only and does not constitute regulated financial advice. The April 2027 changes were enacted in the Finance Act 2026; some HMRC operational guidance may still be developing. Figures are based on rules as at June 2026. Estate planning and IHT are complex and highly individual matters. Global Investments Limited is authorised and regulated by the Financial Conduct Authority. Seek professional advice tailored to your estate and pension circumstances before the April 2027 deadline.

How Global Investments Can Help

The April 2027 pension IHT change is the most significant shift in estate planning for many years. Our advisers are conducting structured pre-2027 estate reviews for clients with substantial pension funds — modelling the total IHT exposure, comparing strategies, and implementing changes before the rules take effect. There is a planning window, and it is open now. Contact Global Investments to arrange a review.