From 6 April 2027, the UK government will introduce one of the most significant shifts in pension and inheritance tax (IHT) policy in recent years. These changes could affect how much tax your loved ones pay on your estate, especially your pension savings.
Rebecca Lee, an Associate Solicitor in our Wills and Probate team, breaks down what's changing, who's likely to be affected most, and how these new rules could impact the way your estate – particularly your pension – is taxed.
What's changing and why it matters
Currently, unused defined contribution pensions can often be passed on to beneficiaries free from inheritance tax. But under the new rules, pension pots will be treated as part of your estate, increasing the likelihood of a 40% IHT charge depending on the total estate value.
This reform is part of a broader government strategy to raise IHT revenue. It's estimated that:
- 10,500 additional estates will begin paying IHT annually from 2027–28
- 38,000 estates will pay more than they otherwise would have
How pensions are treated today
Under the current system:
- if you die before age 75, your pension pot can usually be passed on tax-free
- if you die after age 75, beneficiaries pay income tax on withdrawals, but no IHT
This has made pensions a popular and tax-efficient way to pass on wealth.
What will change in April 2027
From April 2027:
- unused pension funds will be included in your estate for IHT purposes
- beneficiaries may face a double tax burden of IHT on the estate and income tax when withdrawing pension funds
This change primarily affects those who haven't accessed their pensions or die before drawing the full amount, especially those over 75.
How will these inheritance tax changes affect me and my family?
The changes mean that:
- spouses and civil partners will still benefit from the 100% IHT exemption
- unmarried partners, children, grandchildren, and other relatives could face significantly higher tax bills
- people with significant assets (over £2m) might lose the potential for the full Residential Nil Rate Band
- executors will face added complexity, needing to:
– coordinate with pension providers
– complete additional IHT forms
– apportion allowances between different parts of the
estate
– arrange payment of IHT from different parts of the estate
which may be passing to different beneficiaries
This could lead to delays and stress for families during an already difficult time.
How to prepare
To reduce the impact of these changes, you may wish to consider:
- gifting assets using annual exemptions, gifts from income, Potentially Exempt Transfer (PETS) or gifts to a trust
- putting insurance in place to cover any future IHT liabilities
- reviewing and updating your Will and pension nomination forms
- speaking to a financial advisor or estate planning expert who will be able to advise on action that you may wish to consider in relation to your pensions
After 2027, the traditional 'save pensions for last' strategy may no longer be optimal. However, all circumstances are different, and it will be important for you to obtain advice on your specific circumstances.
These changes represent a major shift in how pensions are treated for tax purposes. By understanding the new rules and planning ahead, you can protect your wealth and ensure your loved ones aren't caught off guard by unexpected tax bills.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
