Inheritance Tax on Pension Changes from April 2027

Inheritance tax on pension changes will significantly alter the way unused pension funds and certain pension death benefits are treated when someone dies. For deaths on or after 6 April 2027, most unused pension funds and relevant death benefits will be brought into the deceased person’s estate for Inheritance Tax (IHT) purposes.

This is an important change for people who have historically treated pension savings as assets that could generally pass outside their estate. Pension holders should review how the new rules could affect their overall estate value, available IHT allowances and the amount ultimately passing to beneficiaries. Ultimate personal tax planning in uk can help bring pension income, Inheritance Tax and other personal tax considerations into the same overall review.

What Are the Inheritance Tax on Pensions 2027 Changes?

Under the current rules applying before 6 April 2027, unused funds in many discretionary pension arrangements can normally remain outside the deceased member’s estate for IHT purposes.

For deaths occurring from 6 April 2027, most unused pension funds and pension death benefits will instead be included when calculating the value of the estate for IHT.

The Inheritance tax on pensions 2027 reforms are designed to bring the IHT treatment of inherited pension wealth more closely into line with other assets held at death.

Importantly, the change applies for IHT purposes regardless of whether the pension member dies before or after age 75. Age 75 remains relevant to the separate Income Tax treatment of pension death benefits.

Which Unused Pension Funds Will Be Affected?

The Unused Pension Funds changes are intended to cover most unused pension funds and relevant death benefits payable from registered pension schemes.

The rules can affect benefits arising from defined contribution and defined benefit arrangements, although the treatment depends on the particular type of pension benefit.

Not every pension-related death benefit will be brought into the estate. Important exclusions include certain dependant’s scheme pensions from defined benefit arrangements and collective money purchase arrangements. Death-in-service benefits payable from registered pension schemes will also remain outside the scope of the new IHT rules. Understanding the IHT treatment of unused pension funds in London can help distinguish the benefits affected by the new rules from those that remain outside their scope.

Pension holders should therefore identify exactly what benefits their pension arrangements provide rather than assuming every pension payment will receive the same treatment.

How Will the New Pension IHT Rules Work?

From 6 April 2027, relevant unused pension funds will be considered alongside the deceased person’s other assets when establishing the estate’s overall value.

This can include:

• Property and land.
• Cash and savings.
• Shares and investments.
• Business interests.
• Relevant lifetime gifts.
• Unused pension funds and pension death benefits brought within the new rules.

Including a pension within the IHT calculation does not necessarily mean tax will be payable. The result depends on the value of the entire estate and the exemptions, reliefs and nil-rate bands available.

The standard IHT nil-rate band remains £325,000. A residence nil-rate band of up to £175,000 may also be available where the relevant conditions are satisfied.

Who Will Report and Pay the Inheritance Tax?

One of the important Changes to Pensions from 2027 concerns responsibility for dealing with the tax.

For deaths from 6 April 2027, personal representatives will generally be responsible for reporting relevant unused pension funds and death benefits as part of the estate and paying any resulting IHT.

Pension scheme administrators will therefore need to provide personal representatives with relevant information about pension death benefits. Executors will need to combine this information with the value of the deceased person’s other assets and liabilities when determining the estate’s IHT position. The wider tax responsibilities when managing an estate in London should also be considered, as personal representatives may have separate Income Tax, Capital Gains Tax and estate administration obligations. 

This makes accurate pension records particularly important where an individual has several pension arrangements with different providers.

Will Spouse and Civil Partner Exemptions Still Apply?

Yes. The normal IHT spouse and civil partner exemption remains important under the new regime.

Where qualifying pension benefits pass to a surviving spouse or civil partner, the spouse or civil partner exemption can apply when determining the estate’s IHT liability.

The identity of the beneficiary can therefore materially affect the IHT outcome. Pension holders should review their nominations alongside their wills and wider succession arrangements rather than considering the pension in isolation.

Does the Age 75 Rule Still Matter?

Yes, but principally for Income Tax rather than determining whether relevant pension funds fall within the estate for IHT from April 2027.

Broadly, where the pension member dies before age 75, qualifying pension benefits can often be received without Income Tax, subject to the relevant conditions and pension allowances.

Where the member dies aged 75 or over, pension benefits received by an individual beneficiary are generally taxable as income at that beneficiary’s marginal Income Tax rate. Understanding the tax on inherited private pensions in London can help beneficiaries assess how the member’s age at death and the form of benefit received may affect their Income Tax position.

From April 2027, it is therefore possible for IHT considerations to arise at estate level while separate Income Tax rules apply when pension benefits are subsequently received.

Could Pension Benefits Face Both IHT and Income Tax?

Potentially. This is one of the most important aspects of the Changes to Inheritance Tax from 2027.

A relevant unused pension fund may form part of the deceased person’s estate for IHT purposes. Depending on the circumstances, a beneficiary receiving pension benefits may separately be liable to Income Tax.

Whether either or both taxes create an actual liability depends on factors including:

• The total value of the deceased person’s estate.
• Available IHT exemptions, reliefs and nil-rate bands.
• The pension member’s age at death.
• The type of pension benefit.
• Who receives the pension.
• The beneficiary’s Income Tax position.

Pension planning should therefore consider the interaction between IHT and Income Tax rather than focusing on one tax alone.

Should You Withdraw Pension Funds Before April 2027?

The introduction of the new rules does not automatically mean pension holders should withdraw their savings before April 2027.

Taking money from a pension can itself create Income Tax liabilities. Once withdrawn, money that is retained in a bank account or reinvested personally may already form part of the individual’s estate for IHT purposes.

Large withdrawals could also push an individual into a higher Income Tax band.

Any decision to alter pension withdrawals should therefore consider lifetime income needs, Income Tax, investment objectives and the individual’s entire estate rather than being based solely on the forthcoming IHT change.

Do Pension Nominations Still Matter After April 2027?

Yes. Although the IHT treatment is changing, pension beneficiary nominations and expression-of-wish forms remain important.

They help pension scheme trustees or administrators understand who the member wishes to receive pension benefits, subject to the rules of the particular scheme.

Pension holders should check that nominations remain appropriate after major events such as:

• Marriage or entering a civil partnership.
• Divorce or separation.
• The birth of children or grandchildren.
• The death of an existing beneficiary.
• Changes to a will or wider estate plan.

A pension nomination and a will perform different functions, so both should be considered as part of the individual’s overall succession arrangements. Understanding the requirements for a valid will in London is therefore important for assets passing under the will, while pension death benefits remain subject to the pension scheme’s separate rules.

What Should Pension Holders Review Before 6 April 2027?

The approaching inheritance tax on pension changes provide a clear reason to review pension and estate arrangements before the new treatment takes effect.

A practical review should include:

• Obtaining up-to-date valuations for all pension arrangements.
• Identifying the death benefits provided by each pension scheme.
• Checking beneficiary nominations and expression-of-wish forms.
• Estimating the estate’s value after including relevant pension wealth.
• Reviewing available IHT nil-rate bands, exemptions and reliefs.
• Checking how pension arrangements interact with the individual’s will.
• Considering the potential Income Tax position of intended beneficiaries.

Individuals with substantial pension savings should also consider whether the inclusion of pensions could affect other aspects of their estate planning. Separately, beneficiaries may in some circumstances consider changing a will after death where the original distribution of estate assets no longer achieves the intended succession outcome.

Record-Keeping for the New Pension IHT Rules

Good records will become increasingly important once personal representatives have responsibility for incorporating relevant pension benefits into the IHT calculation.

Pension holders should retain:

• Recent pension statements and valuations.
• Details of each pension provider and policy or scheme.
• Beneficiary nomination records.
• Relevant correspondence with pension providers.
• Records of significant pension withdrawals.
• Details of pension protections or allowances where applicable.

Executors should also know where this information is held. Identifying pension arrangements after death can otherwise delay the valuation of the estate and the administration process.

Why the April 2027 Pension Changes Matter

For many individuals, pensions represent one of their largest assets after their home. Bringing most unused pension funds into the IHT calculation can therefore materially increase the value of an estate exposed to tax. Where substantial company shares or equity awards also form part of an individual’s wealth, estate planning with RSUs can help ensure those assets are considered alongside pensions when assessing the wider estate.

The effect may be particularly significant for someone whose estate excluding pensions is already close to or above the available IHT thresholds.

However, the new rules should not encourage pension decisions based purely on avoiding IHT. Pension withdrawals, gifts, beneficiary choices and wider estate planning can each have different tax and financial consequences.

Preparing for the Inheritance Tax on Pension Changes

The inheritance tax on pension changes taking effect from 6 April 2027 represent a major shift in UK estate planning. Most relevant unused pension funds and pension death benefits will be included in the deceased person’s estate for IHT purposes, while the separate Income Tax rules applying to beneficiaries will continue to operate.

Pension holders should use the period before April 2027 to establish the value and type of their pension benefits, review nominations and assess how pension wealth affects their wider estate. Personal representatives will also need clear pension information to calculate and report the estate’s IHT position correctly after the new rules begin.

Disclaimer: This article provides general information about the UK pension and Inheritance Tax rules applying from 6 April 2027. The tax treatment depends on the pension arrangement, estate value, beneficiary, available exemptions and reliefs, and individual circumstances.

Case Study: Preparing a High-Value Estate for the April 2027 Pension Changes

David approached our Wimbledon office because he held substantial unused pension funds alongside his home, savings and investment portfolio. Under the existing arrangements, he had generally regarded his pension as being outside his estate for Inheritance Tax, but the changes taking effect from 6 April 2027 meant his estate planning needed to be reviewed.

Cigma Accounting obtained an up-to-date picture of David’s pension values and considered them alongside his other assets. We explained that for deaths from 6 April 2027, most relevant unused pension funds and death benefits will be included when calculating the estate’s value for IHT purposes. Because David’s estate was already close to the available IHT thresholds before including his pension, the change could materially increase his potential exposure.

We also reviewed his pension beneficiary nominations and wider succession arrangements. David intended most of his wealth to pass to his wife initially and then to his children. We therefore considered how the spouse exemption, available nil-rate bands and beneficiary choices could interact with the new pension rules rather than treating the pension as an isolated asset.

Our wider work covered David’s personal tax, pension taxation, Inheritance Tax and estate planning. We also modelled the possible Income Tax consequences of pension withdrawals and explained why withdrawing substantial pension funds simply to avoid the forthcoming IHT treatment could create a different tax cost and move the withdrawn money into his personal estate.

David was left with a clearer estimate of his potential estate value after April 2027, updated pension information and a better understanding of which areas of his pension and succession arrangements should be reviewed before the new rules take effect.