Pensions and Inheritance Tax from April 2027: The Full Planning Guide

For decades, the defined contribution pension was one of the most powerful wealth-transfer vehicles available to UK taxpayers. Unspent funds passed to beneficiaries free of inheritance tax (IHT), outside the estate, with income tax treatment depending on whether death occurred before or after age 75. For high-net-worth individuals, the pension was as much a legacy planning tool as a retirement income vehicle.

From 6 April 2027, this changes fundamentally. The reforms enacted in the Finance Act 2026 will bring most unspent pension wealth into the estate for IHT purposes. Understanding what changes, who is affected, and how to respond is one of the most pressing planning priorities for pension holders and their advisers in 2026.

This guide reflects the legislation (Finance Act 2026) and HMRC guidance available as at June 2026. Some HMRC operational detail may still be developing. This guide is informational only; it does not constitute legal or financial advice. Consult a qualified adviser for guidance on your personal estate planning.

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What Changes in April 2027?

Under current rules (pre-April 2027), pension funds held in a registered UK pension scheme at the point of death are not part of the deceased's estate for IHT purposes. The pension is a separate trust arrangement; it never forms part of the estate, and the 40% IHT charge does not apply.

From April 2027, unused pension funds and death benefits payable from most registered pension schemes will be included within the deceased's estate for IHT purposes. The pension assets are aggregated with the rest of the estate, and the combined estate is subject to the standard IHT calculation.

The IHT threshold context:

• Nil-rate band: £325,000 per person
• Residence nil-rate band: up to £175,000 per person (where a residence passes to direct descendants)
• Combined (with transfer of unused allowances from a deceased spouse): up to £1 million for married couples

Pension assets counted in the estate will use up these bands before other assets. For many higher earners and HNW individuals, the pension pot alone may exceed the combined nil-rate bands, leaving the excess subject to 40% IHT.

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What This Means in Practice

Example 1 — Single individual:

• Pension pot: £800,000
• Other estate: £400,000 (property, ISAs, savings)
• Combined estate: £1,200,000
• Less nil-rate band (single person, no residence NRB assumed): £325,000
• Taxable estate: £875,000
• IHT at 40%: £350,000

Under the old rules (pre-2027), the pension would not be in the estate, and only £75,000 would be taxable — generating £30,000 of IHT. The new rules increase the IHT bill by £320,000 in this example.

Example 2 — Married couple (both pass away):

• Combined pension pots: £1.2m
• Other estate: £800,000
• Combined estate: £2m
• Less combined NRBs and RNRB (up to £1m): £1m
• Taxable estate: £1m
• IHT at 40%: £400,000

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Which Pension Arrangements Are Affected?

The changes apply to most registered UK pension schemes, including:

• Self-invested personal pensions (SIPPs)
• Personal pensions
• Group personal pensions
• Master trust workplace pensions (NEST, The People's Pension, Smart Pension, etc.)
• Small self-administered schemes (SSAS)

Defined benefit pensions: The IHT rules for DB lump sums payable on death are also changing. Pension guarantees (lump sums payable on death during a guaranteed period) and dependant's pensions are included within scope, though the detail on DB schemes is more complex.

Annuities already in payment (single life, no guarantee): These end at death and nothing is payable. No IHT issue arises.

Joint life annuities and guaranteed annuities: The value of any residual promise may be brought into the IHT calculation. Specialist actuarial advice will be needed in these cases.

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The Administration Challenge: Who Pays the IHT?

An earlier consultation proposal would have required pension scheme administrators to calculate and pay the IHT on the pension element directly to HMRC before releasing funds to beneficiaries. That approach was dropped in the final legislation. Under the Finance Act 2026 (which received Royal Assent in March 2026), 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 they are not left funding the charge from elsewhere.

Key practical issues:

• How pension trustees and providers communicate with the estate's personal representatives
• How the nil-rate band is apportioned between the pension and the rest of the estate
• Liquidity: if the estate's liquid assets are insufficient to pay IHT, the pension pot may need to be partially drawn down to fund the charge
• Timeline: pension death benefits are currently paid within two years of death; IHT must be paid within six months of the month-end following death

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Planning Strategies Before April 2027

The window between now and April 2027 offers meaningful planning opportunities. The most effective strategies depend on the individual's circumstances, financial goals, and family structure.

1. Draw down more from the pension now

If you have substantial other assets (ISAs, investment portfolios, property), consider drawing pension income faster — reducing the undrawn pension pot before 2027. Money spent, donated, or redistributed in your lifetime is not in your estate. Money in an ISA that is already spent or given away is also not in your estate.

Be mindful of income tax on withdrawals: large withdrawals push income into higher tax bands. A phased strategy over multiple tax years may minimise the income tax cost of accelerated drawdown.

2. Gift more to children now using annual exemptions

Lifetime gifts are generally exempt from IHT if the donor survives seven years. Annual gift exemptions of £3,000 per person are available free of any seven-year taper. Immediate gifting from pension-funded drawdown can reduce the taxable estate while the seven-year clock starts running.

3. Consider a spousal pension strategy

Married couples who transfer pension assets to a surviving spouse have the spouse's own nil-rate band available. This does not eliminate the eventual IHT charge but defers it and potentially doubles the nil-rate band available on the survivor's death.

4. Charitable giving from pension proceeds

Gifts to UK-registered charities are exempt from IHT entirely. If part of your estate planning goal is philanthropy, directing pension proceeds toward charitable beneficiaries (via expression of wishes or direct charitable trust nominations) can remove them from the IHT calculation. A will that leaves 10% or more of the net estate to charity reduces the IHT rate on the remainder to 36%.

5. Life insurance to cover the IHT liability

A whole-of-life insurance policy written in trust can provide a lump sum on death, tax-free (because it is written in trust, not in the estate), to cover the IHT bill. The premiums are paid from post-tax income. This strategy does not reduce the IHT bill but ensures liquidity to pay it without forcing asset sales.

6. Review nominations and expressions of wishes

Post-2027, the choice of pension beneficiary has IHT implications. Directing pension funds to a surviving spouse using the spousal transfer — potentially to a flexi-access drawdown in the spouse's name — uses the spouse's own allowances. Directing funds to adult children or trusts may trigger the IHT charge immediately. Review all pension nominations with an adviser before April 2027.

7. Offshore bonds and other wrappers

For some HNW individuals, moving assets out of the pension into offshore investment bonds or other wrappers that sit within estate plans may be worth modelling. The tax treatment of offshore bonds is complex and a full cost-benefit analysis is essential.

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What Has NOT Changed (as at June 2026)

• The income tax treatment on death: pension lump sums to beneficiaries from holders who die under 75 remain income-tax free; those from holders who die at 75 or over are taxed as income in the hands of beneficiaries. This did not change in April 2027 — only IHT.
• Spousal exemption: transfers between spouses and civil partners remain exempt from IHT
• Charitable exemption remains intact

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The QROPS and Offshore Pension Question

For UK non-residents with existing QROPS (Qualifying Recognised Overseas Pension Schemes), the April 2027 changes to UK IHT on pension pots require careful review. Whether QROPS assets are within the scope of UK IHT depends on the individual's domicile, residency, and the nature of the QROPS arrangement. The domicile rules for IHT are themselves changing (non-dom IHT reform from April 2025 shifted to a residency-based system). Specialist advice on the interaction between these reforms is strongly recommended.

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How Global Investments Can Help

Global Investments works with high-net-worth individuals — including many with substantial UK pension assets alongside international property, investment portfolios, and business interests — to build estate plans that respond to the April 2027 changes effectively. Our adviser network includes specialists in UK IHT planning, pension drawdown strategy, trust structures, and international estate planning for clients with multi-jurisdiction assets.

Whether you are planning to accelerate pension drawdown, restructure beneficiary nominations, establish a life insurance policy in trust, or review a QROPS arrangement in light of the new rules, we can build a comprehensive strategy before the April 2027 deadline. Contact our team to arrange an estate planning review.

Tax rules can and do change. This guide reflects the position as understood in June 2026. The April 2027 changes were enacted in the Finance Act 2026 (Royal Assent March 2026), though some HMRC operational guidance may still be developing. Nothing in this guide constitutes regulated financial or legal advice.