Pensions and Inheritance Tax: Planning Before the April 2027 Changes

The Changing Landscape

For decades, UK pensions have occupied a privileged position in estate planning. Because pension death benefits are typically paid at the discretion of scheme trustees (and do not form part of the deceased's estate), they have generally fallen outside the scope of inheritance tax (IHT). This made pensions — particularly large SIPPs — highly effective vehicles for passing wealth to the next generation.

In the Autumn Budget of October 2024, the then-Chancellor announced that from 6 April 2027, most unused pension funds and death benefits would be included within the taxable estate for IHT purposes. Following a consultation, the change was legislated in the Finance Act 2026, which received Royal Assent on 18 March 2026.

This represents one of the most significant changes to pension planning in a generation. The measure now has statutory force, taking effect for deaths on or after 6 April 2027, though HMRC guidance on certain operational details continues to develop.

This guide explains what the legislation provides, what operational detail is still bedding in, and what planning steps may be appropriate in the interim.

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The Current Position (Pre-April 2027)

Under the rules applying up to 5 April 2027 (assuming no acceleration of the change):

Defined Contribution Pensions

Uncrystallised DC pension funds (including SIPPs and personal pensions) pass outside the deceased's estate on death. They are not subject to IHT, regardless of the size of the fund. Nominations are made via expression of wishes forms, and scheme trustees (or in practice, the pension provider for personal pensions) distribute at their discretion — typically following the nomination.

The income tax treatment of inherited DC pensions depends on the member's age at death:

• Death before age 75: Beneficiaries receive the inherited pension fund tax-free. Lump sums or drawdown income are both free of income tax.
• Death at or after age 75: Beneficiaries pay income tax at their marginal rate on any lump sum or drawdown income received from the inherited pension.

This means the most IHT and income tax-efficient outcome under current rules is death before 75 with an uncrystallised DC pension — where neither IHT nor income tax applies to the inherited fund. While death before 75 cannot be planned for with certainty, the structure encourages those with large DC pensions to delay drawing on them in favour of other assets during early retirement.

Defined Benefit Pensions

Lump sum death benefits from DB schemes (such as a scheme paying three times salary on death in service) are typically paid to trustees and do not form part of the estate. Dependants' pensions paid to a surviving spouse or civil partner are also outside the estate.

Preserved DB pensions that were not yet in payment may also generate a lump sum on early death under scheme rules — again, typically outside the estate.

State Pension

The State Pension is not an asset and does not pass to beneficiaries. It ceases on death.

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The 2027 Changes (Finance Act 2026)

The Finance Act 2026 brings most unused pension funds and death benefits within the IHT charge for deaths on or after 6 April 2027. The key elements:

1. All unused pension funds in registered pension schemes become part of the estate for IHT purposes on death. An "unused" fund is broadly one that has not been used to provide an income; for money purchase arrangements this means the remaining pot.
2. IHT applies at 40% on the chargeable estate (including the pension), less the nil rate band (NRB — £325,000 per person) and any transferable NRB from a deceased spouse (up to £650,000 combined), and the residence nil rate band (RNRB — £175,000 per person) where applicable.
3. The income tax charge on inherited drawdown remains where death is at or after age 75 — so inherited pension funds could face IHT at 40% and then income tax at the beneficiary's marginal rate on drawdown, creating a combined charge well above 40% in some scenarios.
4. Administration: Personal representatives of the estate (not scheme administrators) are responsible for reporting and paying the IHT on unused pension funds and death benefits. They may ask schemes to withhold up to 50% of the benefits for up to 15 months after death so the tax can be settled.

Some operational detail — including aspects of the treatment of dependants' drawdown and the precise mechanics of reporting — continues to be clarified through HMRC guidance.

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Planning Strategies in the Current Window

Even given the uncertainty, there are sensible planning actions that may be appropriate in the period before April 2027:

1. Spend Pension Assets Last

Under current rules, non-pension assets — property, investments, ISAs — are subject to IHT; pension assets are not. This creates a clear logic: in retirement, draw on non-pension assets first (ISA withdrawals, investment portfolio, rental income, property equity release) and preserve pension assets as long as possible.

Post-2027, this logic reverses partially: pension assets will carry IHT, broadly equalising the estate planning position between pensions and other assets. However, the income tax advantage of pension funding and the ongoing growth within a tax-efficient wrapper remain.

2. Accelerate Pension Drawdown Strategically

Some individuals with large DC pension pots that they do not need for income may consider accelerating drawdown now, before the IHT change takes effect — taking out taxable income and reinvesting in ISAs or other vehicles. The trade-off:

• Income tax today on the 75% taxable element of drawdown.
• Avoidance of IHT in future on the pension pot.

Whether this makes sense depends on the marginal income tax rate on drawdown vs. the likely IHT rate on death. For those at basic rate (20% income tax), drawing down and investing in ISAs before 2027 to avoid a future 40% IHT charge may be efficient. For additional rate (45%) taxpayers, the combined current income tax cost may exceed the prospective IHT saving.

This calculation is complex and individual-specific. Professional advice is essential.

3. Review Spousal Pension Arrangements

Under current rules, pension death benefits paid to a surviving spouse are outside the estate. Under the proposed new rules, the IHT spouse exemption would apply — assets passing to a UK-domiciled surviving spouse are exempt from IHT — so pension funds passing to a surviving spouse should not attract IHT. However, funds that then pass on the second death to children or other beneficiaries would be included.

Married couples with significant pension pots should review their nomination strategy: directing pension funds to a spouse continues the current deferral, but ultimately the IHT charge on the next generation cannot be indefinitely deferred.

4. Consider Increasing Contributions Now

Pension contributions receive income tax relief (40% or 45% for higher and additional rate taxpayers). Even if the IHT advantage is reduced from 2027, the upfront tax relief on contributions remains highly valuable. Maximising contributions now — including using carry forward — locks in the income tax advantage and builds the fund efficiently.

5. Charitable Pension Nominations

Leaving pension assets to registered charities avoids IHT (charities are exempt). For philanthropically inclined individuals, nominating a pension (or part of a pension) to charity and passing other assets to family may produce a better combined outcome.

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Points of Detail Still Bedding In

The headline rules are now law, but several operational points continue to be worked through in HMRC guidance and practice:

• The precise interaction of the double charge (IHT + income tax on drawdown for deaths at or after 75) and how beneficiaries should sequence claims.
• The valuation and reporting mechanics for DB lump sum death benefits.
• How overseas pensions (QROPS, QNUPS) sit within the new framework.
• The practical workflow between personal representatives and scheme administrators for withholding and paying the charge.

Given that some of this detail is still settling, major irreversible decisions — such as large accelerated drawdowns or drastic changes to pension structure — should be taken on up-to-date advice.

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Compliance and Risk Warnings

Tax law is set by Parliament and can change at any time. The 2027 pension IHT changes are now law under the Finance Act 2026 (Royal Assent 18 March 2026), but related HMRC guidance and operational detail continue to develop. Do not make irreversible financial decisions without current, individual advice.

IHT planning, drawdown strategy, and pension structuring involve complex interactions between income tax, capital gains tax, and inheritance tax. The value of pension investments can fall as well as rise. Professional regulated financial advice and specialist tax advice are strongly recommended before making any decisions in anticipation of these changes.

Rules applicable to pension death benefits, IHT nil rate bands, and related matters may all be subject to further change in future Budgets.

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How Global Investments Can Help

The proposed pension IHT changes represent a step-change in estate planning for many of our clients. At Global Investments, we are helping clients think through the implications for their retirement income plans, estate planning structures, and asset distribution strategies in advance of April 2027.

We work alongside IHT specialists, FCA-regulated financial advisers, and tax counsel to help clients navigate the transition — avoiding hasty decisions while taking sensible steps to understand the options.

Whether you have a large SIPP, a portfolio of legacy pensions, or are navigating this question across multiple jurisdictions, Global Investments can help you think through the strategy with the rigour it deserves. Contact us for a confidential consultation.