Your pension and the 2027 inheritance tax change: what's actually happening

If you have a pension, the rules around what happens to it when you die are about to change significantly. From April 2027, unused pension funds will generally be included in your estate for inheritance tax purposes. For many families, this could be the biggest tax change in a generation.

Right now, most defined contribution pensions sit outside your estate. That has made them one of the most tax-efficient assets you can pass on. That advantage is set to disappear.

What is actually changing?

Under the current rules, if you die before age 75, your beneficiaries typically receive your unused pension pot free of income tax and free of inheritance tax. If you die after 75, they pay income tax on withdrawals, but there is still no inheritance tax. From April 2027, the pension pot itself will be counted as part of your estate and could attract inheritance tax at 40%.

The practical effect is that your beneficiaries could face both income tax on withdrawals and inheritance tax on the underlying fund. In some scenarios, the combined charge could exceed 60p in every pound.

Who is most affected?

The change matters most if your combined estate, including your pension, takes you over the inheritance tax thresholds. Those thresholds are £325,000 per person (the nil-rate band) plus up to £175,000 if you are passing a family home to direct descendants. For a married couple, that could mean up to £1 million before inheritance tax applies on the rest.

But here is where many people are caught off guard. You might look at your estate, see a house worth £400,000 and savings of £100,000, and feel comfortable. Add in a pension pot of £300,000 and the picture looks quite different.

• Those with SIPPs or personal pensions built up over a working life
• Anyone who has been drawing down from their pension but has a significant pot remaining
• People who planned to pass their pension to children or grandchildren as a core part of their estate plan
• Couples whose combined estate plus pension pots will exceed the thresholds

Why acting before April 2027 may matter

The window before April 2027 is a genuine planning opportunity, but it is not unlimited. Any restructuring, whether that means reviewing how much you draw down, considering how gifts interact with your estate, or looking at trusts, takes time to set up properly.

Some strategies, like making gifts and waiting for the seven-year clock to run, require years to have their full effect. Advice sought in early 2027 is simply less useful than advice sought in 2025 or 2026.

It is also worth reviewing your pension death benefit nominations. These are separate from your will, and many people have outdated nominations in place. Changing who receives your pension on death does not by itself solve the tax position, but it is a foundational step.

What this does not mean

The April 2027 change does not make pensions a bad place to save. Pensions still offer significant income tax relief on contributions and tax-free growth. The change simply removes one particular exit advantage.

It also does not mean you should rush into any single solution. Drawdown strategies, gifting, and trust arrangements each have different implications depending on your age, income needs, and family situation. There is no universal answer.

Where to start

The most useful first step is getting a clear picture of your total estate, including your pension. Many people have not done this calculation with the post-2027 rules in mind. Once you know where you stand, you can weigh the options with a specialist.

The earlier you do this, the more options are available to you. Some planning steps simply cannot be rushed without losing their effectiveness.

Devonshire Wealth connects UK families with estate planning specialists who can assess how the April 2027 pension changes affect your specific situation. Visit our inheritance tax planning page to get matched with a qualified adviser.