For decades, pensions have been one of the most effective ways to pass wealth to the next generation. Money left in a defined contribution pension has generally sat outside your estate for inheritance tax purposes — which is why many financially comfortable families have deliberately spent other assets first and preserved their pensions for their children.
From 6 April 2027, that strategy is due to be turned on its head. Under confirmed government plans, unused pension funds and most pension death benefits are set to be brought into the value of your estate when calculating inheritance tax. For families whose wealth is concentrated in pensions and property, the impact could be substantial.
What is changing?
Inheritance tax is charged at 40% on the value of an estate above the available allowances — the Nil Rate Band (NRB) of £325,000, plus up to £175,000 of Residence Nil Rate Band (RNRB) where a home passes to direct descendants. Both allowances have been frozen for years while asset values have risen, which is why HMRC’s inheritance tax receipts keep setting records.
Until now, unused pension funds have largely escaped this calculation. From April 2027 they are due to be counted in — meaning a family with, say, a £600,000 home and a £500,000 untouched pension could move from expecting little or no inheritance tax to facing a six-figure bill, depending on their circumstances.
Who is most affected?
Broadly, the change matters most to those who could afford to leave their pensions untouched: higher earners, business owners, senior professionals and anyone who has deliberately drawn on ISAs, savings or property income first in order to preserve their pension as an inheritance. In other words, the people for whom pensions-as-legacy planning worked best are the people with most to review now.
What can you do about it?
There is no single answer, and the right response depends entirely on your circumstances — but the strategies worth discussing with an adviser include rethinking the order in which you draw on your assets in retirement, making greater use of gifting during your lifetime, reviewing your pension beneficiary nominations, considering whether life cover written in trust could provide for a future tax bill, and revisiting your estate plan as a whole rather than treating the pension in isolation.
Two cautions are worth stating plainly. First, doing nothing is a decision in itself — and with the change due in April 2027, the window to plan calmly is now. Second, acting rashly can be just as costly: drawing large sums from a pension purely to avoid future inheritance tax can trigger income tax at up to 45% today (possibly 60% if your Personal Allowance is lost). This is exactly the kind of decision that should be modelled properly before anything is done.
Review your position before April 2027
We help clients across Greater Manchester, Lancashire, Cheshire and the UK to plan their estates with these changes in mind — as part of our Inheritance Tax and Estate Planning service and our wider advice for High Net Worth Individuals. A review now means the decisions are made on your timetable, not the taxman’s.
This article is for general information only and does not constitute advice. Tax rules described reflect announced government plans at the time of writing and may change before or after implementation. Tax treatment depends on your individual circumstances. Inheritance tax and estate planning, and some forms of trust advice, are not regulated by the Financial Conduct Authority. Retirement Professionals Ltd is an appointed representative of pi financial ltd, authorised and regulated by the Financial Conduct Authority. FCA number 622943.