How The 2027 Pension IHT Shock Could Hurt Your Family
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For many years, pensions have been treated differently from most other assets for Inheritance Tax purposes, falling outside of the estate and therefore not attracting IHT charge.
That will change on 6 April 2027.
From that date, most unused pension funds and pension death benefits will be included when calculating the value of a person’s estate for Inheritance Tax. This could increase the tax payable, create cash-flow problems for executors and reduce the amount ultimately received by beneficiaries.
With fewer than eight months remaining, we will look at How The 2027 Pension IHT Shock Could Hurt Your Family and the opportunity to review existing arrangements and take measured action.
What is changing on 6 April 2027?
Under the present rules, many unused pension funds held within discretionary pension schemes can pass to beneficiaries without forming part of the deceased member’s estate for Inheritance Tax.
For deaths occurring on or after 6 April 2027, most unused pension funds and pension death benefits will be added to the value of the deceased’s other assets, including:
Their home and other property
Savings and investments
Business interests
Personal possessions
Certain gifts made during their lifetime
Most remaining pension wealth
The combined value will then be assessed against the available Inheritance Tax allowances and exemptions.
The standard nil-rate band is currently £325,000. An additional residence nil-rate band of up to £175,000 may be available when a qualifying home passes to direct descendants, although this is subject to conditions and begins to be withdrawn where an estate exceeds £2 million.
Transfers to a spouse or civil partner will generally remain exempt, including qualifying pension death benefits passing to them. Death-in-service benefits payable from a registered pension scheme and certain dependant’s pensions are also excluded from the new rules.
Married couples may see no impact, as the pension will pass to the survivor, and the impact will be on that 2nd death when the pensions may have little or no value depending on the sources of income drawn/spent first.
The change has already been legislated for in the Finance Act 2026 and applies according to the date of death, not the date on which pension benefits are eventually paid.
Which types of pension schemes are included?
The new rules are wide-ranging and will cover most pension arrangements capable of providing unused funds or death benefits. These may include:
Defined contribution pensions, including personal pensions and workplace money-purchase schemes
Self-Invested Personal Pensions (SIPPs)
Small Self-Administered Schemes (SSASs)
Unused pension drawdown funds
Certain lump-sum death benefits from defined benefit or final-salary schemes
Some qualifying non-UK pension schemes
Certain employer-funded overseas retirement benefit schemes
The amount included will depend on the value of the unused pension fund or the death benefit available immediately before death.
Some benefits remain outside the new rules, including registered pension scheme death-in-service benefits and certain dependant’s scheme pensions from defined benefit or collective money-purchase arrangements.
The rules can apply even where pension trustees retain discretion over who receives the benefits. Having an expression-of-wish form or discretionary nomination will therefore not, by itself, keep the pension outside the IHT calculation.
Because pension scheme rules differ, each arrangement should be checked individually rather than assuming that a particular pension is either fully included or excluded.
Why could the impact be significant?
A pension may represent one of a family’s largest assets. Someone with a £700,000 property, £200,000 of savings and a £500,000 pension may currently regard their estate as being worth £900,000 for broad IHT-planning purposes.
From 6 April 2027, their assessable estate could instead be worth approximately £1.4 million.
The precise liability would depend on marital status, beneficiaries, available allowances, previous gifts and other reliefs. However, bringing the pension into the calculation could produce a substantial additional tax charge.
As a simple illustration, if a £400,000 pension falls entirely above the available IHT allowances, the additional exposure could be as much as:
£400,000 × 40% = £160,000
This is not necessarily the final tax outcome, but it demonstrates why pension values can no longer be left out of an estate-planning calculation.
The timescale is now becoming critical
It may be tempting to regard April 2027 as distant, but effective estate planning rarely happens immediately.
Before making changes, it may be necessary to:
Obtain current valuations from several pension providers
Establish which pension benefits are within the new rules
Review expression-of-wish or nomination forms
Recalculate the estate’s available IHT allowances
Examine previous lifetime gifts
Assess future income and retirement requirements
Consider the tax consequences of withdrawing pension funds
Review wills, trusts, life cover and beneficiary arrangements
Obtain coordinated tax, pension, investment and legal advice
Some planning strategies also need time to become effective. For example, many lifetime gifts only fall completely outside the estate if the donor survives for seven years. Waiting until April 2027 to begin reviewing the position could therefore mean losing valuable planning time.
The objective should not be to withdraw or give away pension funds hastily. It should be to understand the revised exposure early enough to make properly informed decisions.
What should you do before April 2027?
7 steps you should take now to understand your position and plan an way forward if needed.
1. Recalculate the value of your estate
Your estate calculation should now include an up-to-date value for every pension that may provide unused funds or death benefits.
2. Review how you fund retirement
Some people have deliberately preserved their pension while spending savings and investments first, partly because pensions offered favourable IHT treatment.
That approach may no longer produce the best overall outcome after April 2027.
3. Review pension nominations
Expression-of-wish and beneficiary nomination forms should be checked to ensure they still reflect your intentions.
Although nominations will not generally prevent the pension from being considered for IHT after April 2027, they remain important because they guide pension trustees when deciding who should receive the benefits.
They should also be reviewed alongside your will. A will does not normally control discretionary pension benefits, so inconsistent documents can produce unwanted results.
4. Consider lifetime gifting
Where financial security permits, lifetime gifts may reduce the future value of an estate.
Gifting should never compromise the donor’s standard of living or ability to meet future care costs. Proper records are also essential, particularly when relying on the exemption for normal expenditure out of income.
5. Assess estate liquidity
IHT is normally due by the end of the sixth month following the month of death. From April 2027, personal representatives will be responsible for reporting and paying the tax attributable to pension wealth as well as the wider estate.
This could create a problem where an estate is valuable but has limited accessible cash—for example, where most wealth is held in property and pensions.
The new process will allow personal representatives, in specified circumstances, to direct a pension provider to withhold part of the pension benefits and pay the attributable IHT. Up to 50% of potentially taxable pension benefits may be withheld for as long as 15 months.
Nevertheless, families should not assume that pension money will be immediately available. A liquidity review should be considered.
6. Review life assurance
A suitable whole-of-life policy may provide funds to meet an expected IHT liability without forcing executors to sell property or investments.
For the proceeds to remain outside the taxable estate, the policy will usually need to be written under an appropriate trust. Affordability, medical underwriting and the long-term cost of premiums must all be considered.
Starting this review early is important because insurance can become more expensive or unavailable as age increases or health changes.
7. Update wills and estate documents
The pension change should prompt a coordinated review of:
Your will
Pension nominations
Lasting Powers of Attorney
Trust arrangements
Lifetime gifts
Life assurance
Ownership of property and investments
The choice of executors
This is particularly important where the pension beneficiaries differ from the beneficiaries of the main estate. Without careful planning, the estate could initially fund tax connected with benefits passing to someone else.
What happens after 6 April 2027?
For deaths on or after the commencement date, personal representatives will need to identify all relevant pension arrangements and obtain the necessary values from pension providers.
The pension values will be combined with the rest of the estate to determine whether IHT is payable. The amount attributable to each pension and beneficiary may then need to be calculated and communicated.
This is likely to make some estates:
More expensive to administer
Slower to complete
More dependent on cooperation between executors, advisers and pension providers
More vulnerable to late-payment interest if information is delayed
More likely to experience a shortage of accessible cash
Pension beneficiaries may also become jointly and severally liable for the IHT attributable to their benefits once those benefits have been allocated to them.
Where pension benefits are inherited by someone other than a spouse or civil partner, Income Tax may also apply when the beneficiary draws funds, particularly where the pension member died aged 75 or over. This could give rise to tax of up to 67% being paid!
What is a 2027 Pension-IHT Impact Review?
A 2027 Pension-IHT Impact Review establishes how the new rules could affect your family before they come into force.
The review should:
Calculate the current value of your estate, including relevant pensions.
Estimate your IHT position under the rules applying from 6 April 2027.
Identify any loss or restriction of available allowances.
Measure the additional tax attributable to pension wealth.
Assess whether your executors would have sufficient cash to pay the tax.
Review pension nominations, wills and beneficiary arrangements.
Identify practical estate-planning opportunities.
Produce a prioritised action plan for the period before April 2027.
The purpose is not simply to produce a tax figure. It is to identify whether the family could face a larger liability, an avoidable administrative burden or a serious liquidity problem and to decide what can still be done and provide time to put any strategies into place before the April 2027 date.
Do not wait until the rules take effect
The inclusion of pensions within IHT represents a fundamental change to retirement and estate planning.
A strategy based on preserving the pension as an IHT efficient inheritance may no longer be suitable. Equally, withdrawing pension funds or making large gifts without modelling the consequences could create unnecessary Income Tax, investment or financial security risks.
The right approach will depend on the value and type of pension, the wider estate, the intended beneficiaries and the individual’s future income needs.
With the implementation date approaching, the most important first step is to calculate your revised position.
