From 6 April 2027, the UK government will change how inheritance tax (IHT) applies to pensions. Under the new rules, most unused defined contribution pension funds will be included in a person’s estate on death, making them potentially liable to IHT for the first time.
This marks a major shift in estate planning and will affect thousands of families each year, particularly those with larger pension pots.
At present, defined contribution pensions (such as personal pensions and SIPPs) are generally not counted as part of the estate for IHT purposes. If someone dies before age 75, their pension savings can usually be passed to beneficiaries completely tax-free. If they die after 75, the funds remain outside the IHT net, although income tax applies when the beneficiary draws money from the pot.
For many, this has made pensions a highly efficient way to pass on wealth.
Starting in April 2027, most unused pension funds will be treated as part of the deceased’s estate. This means that, if the estate exceeds the IHT threshold (currently £325,000 plus any residence allowance), the pension pot may be taxed at up to 40%.
Beneficiaries could still face income tax on any money they withdraw, meaning some inherited pension savings may now be taxed twice… first under IHT, then under income tax rules.
This change is likely to affect wealthier households or those who have built up significant pension savings without drawing on them. Government figures suggest more than 10,000 estates each year will now face IHT solely due to pension wealth, with thousands more seeing higher tax bills overall.
Under the new rules, responsibility for reporting pensions shifts from pension providers to executors. Personal representatives of the estate will need to locate all relevant pensions, obtain valuations, and report them to HMRC, adding further complexity to an already stressful process.
Penalties may apply if these details aren’t provided within the required time frame, even if the estate isn’t large enough to trigger a tax bill.
With the changes now confirmed, individuals should review their estate plans and pension strategies. Some may wish to draw down more of their pension in retirement, rather than leaving it untouched. Others may consider lifetime gifting of other assets, using trusts, or insurance policies to help cover future IHT costs.
It’s also essential to update nomination forms and keep records of all pension schemes to help executors handle future reporting requirements.
The government’s decision to include pensions within IHT from April 2027 is a significant development. Pensions will no longer be entirely tax-sheltered at death, and this may affect how people save, spend, and plan for the next generation.
Those with substantial pension savings should act now to ensure they make the most of existing reliefs and avoid surprises later. Professional advice can help identify practical options to reduce potential tax exposure and ease the burden on future beneficiaries.
If you are affected by the new rules or wish to explore your planning options, please contact us at ETC Tax for tailored guidance.
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