The 2027 Pension - Inheritance Tax Rule Change Explained Clearly

For many years, pensions have played a unique role in later life financial planning. Not only have they provided retirement income, but they have also sat largely outside the inheritance tax (IHT) net, making them an effective way of passing wealth to the next generation.

From April 2027, this will no longer be the case.

In Labour’s first Budget in 2024, it was announced that many pensions would be included when calculating the value of an estate for inheritance tax purposes.

How pensions are treated today

Under the current system, most defined contribution pensions are not normally included in your estate for IHT. When someone dies, pension funds are usually passed on separately to beneficiaries using pension nomination forms, rather than through a Will.

This has meant pensions have often been used strategically:

to provide income during retirement
and, where possible, to pass on wealth efficiently

In contrast, assets such as property, savings and investments are included in the estate and assessed for IHT.

A reminder: how inheritance tax works

Inheritance tax is currently charged at 40% on the value of an estate above certain thresholds. Your estate is made up of all your assets – savings, investments, property, possessions etc.

At present:

Each individual has a £325,000 nil-rate band, which is IHT-free
If you leave your home to children or grandchildren, you may also benefit from a £175,000 residence nil-rate band
This means an eligible individual could pass on up to £500,000 tax-free
For married couples or civil partners, unused allowances can be transferred, potentially protecting up to £1 million

These thresholds have remained frozen for several years, meaning more people are gradually being drawn into the IHT net.

What’s changing from April 2027?

From April 2027, most defined contribution pensions (including SIPPs and personal pensions) left unused when someone dies will be counted as part of their estate. For households with property wealth and healthy pension savings, this could mean many more families will now face an IHT bill if no action is taken.

Some pensions are unaffected, including:

Dependants’ pensions from defined benefit (e.g. final salary) schemes
Survivors' pensions from annuities
Death in service lump sums tied to pension schemes if the person who died was still working.
Eligible lump sums paid to registered charities

These new rules could mean families paying significant tax on pensions that have long been outside the IHT net, especially for those over 75 or with larger pension pots.

Who is most likely to be affected?

The changes are likely to have the greatest impact on:

homeowners with above-average property values
people who have built up sizeable defined contribution pension pots
couples whose combined assets are close to the £1 million mark
families planning to pass wealth down to children or grandchildren

Importantly, you don’t need to consider yourself ‘wealthy’ for this to apply. For many households, rising house prices and long-term pension saving have done much of the work already.

Who will pay the inheritance tax bill due on pensions?

Inheritance tax on pensions will initially be the responsibility of the estate’s executors or personal representatives.

However, pension beneficiaries (if different from those inheriting the rest of the estate) can request that the pension provider pays the tax directly, if certain conditions are met and the tax bill exceeds £4,000.

IHT must be paid by the end of the sixth month after the person died to avoid interest charges. Currently, interest is charged at 4% above the Bank of England base rate.

What about income tax?

Remember that if someone dies aged 75 or older, their beneficiaries already pay income tax on anything they withdraw from an inherited pension. This doesn’t change, but it does mean that some beneficiaries could face both inheritance tax and income tax on the same pension. That’s a substantial combined tax burden to consider - potentially over 80% taxation in some situations if no action is taken.

What should I do now?

Although the changes don’t take effect until April 2027, it’s wise to review your arrangements well in advance. A few key things to think about:

Think about when and how to access your pension – some people may now take more from their pensions during their lifetime, or rethink the order they draw from ISAs, pensions, and other assets.
Consider taking tax-free cash – if you haven’t already, especially if you are over 75, seek advice on taking tax-free cash from your pension, it might be more tax efficient to take it and do nothing with it than leave it in your pension now.
Review your pension nominations – just as you would your Will. Who inherits what, and does it still reflect your wishes? Have you considered the tax implications?
Consider your spouse or civil partner’s position – the spousal exemption still offers protection from IHT, so it may make sense to switch your nominations closer to 2027.
Use gifts to reduce IHT exposure – taking income from your pension and gifting it (especially if done regularly and from surplus income) could reduce the chance of tax later on.

How we can help

At Harold Stephens, we help individuals and families make sense of complex changes and plan with confidence for the years ahead.

If you’re unsure how the upcoming pension and inheritance tax changes could affect you, why not come along to one of our free seminars so you can start to understand your position and potential planning options for your situation.

The Swan, Thornbury - Tuesday 17th March – 10.30 – 11.30am – breakfast seminar.

St Peter’s Church, Henleaze – Wednesday 18th March – 2.30 – 3.30pm

Stoke Lodge, Stoke Bishop – Tuesday 24th March – 4.30 – 5.30pm

Amy Wood6 January 2026