Pensions and Inheritance Tax: The April 2027 Changes — What You Need to Know

The announcement in the October 2024 Autumn Budget that the government intended to bring pension funds within the scope of inheritance tax generated significant attention — and not without reason. For decades, pension savings have occupied a uniquely favourable position in the UK tax framework: accumulated outside the estate, passed to beneficiaries free of IHT, and (if the member died before 75) received entirely free of income tax. The proposed change would dismantle part of this advantage, and it has prompted a genuine need to review retirement and estate planning for clients with substantial pension assets.

In this guide we explain the current position, what the Finance Act 2026 has now confirmed, how the mechanism will work, who is most affected, and the planning steps available before April 2027.

The Current Position: Pensions Outside the Estate

Under the rules in force as of June 2026, pension funds — including SIPPs, personal pensions and most defined contribution workplace schemes — do not form part of the deceased's estate for inheritance tax purposes. This is not a loophole or an oversight; it is a deliberate feature of the pension taxation framework, rooted in the fact that pension funds are held on trust by the scheme trustees rather than owned directly by the member.

Because the trustees retain discretion over how death benefits are distributed (guided by the member's Expression of Wishes), the pension fund is not a controlled asset of the deceased and therefore falls outside the estate. The 40% IHT charge that applies to assets above the £325,000 nil-rate band does not apply.

This has made large pension pots extraordinarily effective estate planning vehicles. Many clients deliberately draw from ISAs, investment accounts and other savings first in retirement, leaving the pension pot intact — knowing that it can pass to their beneficiaries free of both IHT (at death) and income tax (if death is before age 75). For clients with estates comfortably above the IHT threshold, this strategy has produced very significant tax savings across generations.

The Change: Pensions Within the IHT Estate from 6 April 2027

In the October 2024 Autumn Budget, the government announced its intention to bring unused pension funds and death benefits within the scope of IHT from April 2027. The stated rationale was that pensions were increasingly being used as a wealth transfer vehicle rather than a retirement income tool — and that the IHT exemption was producing outcomes that were inconsistent with the original purpose of pension tax relief. That intention was enacted in the Finance Act 2026 following a technical consultation in 2025.

Under the enacted rules:

• The value of unused pension funds at the member's death is included in the taxable estate
• IHT at 40% would be charged on amounts above the available nil-rate bands
• Responsibility for reporting and paying the IHT due on unused pension funds rests with the deceased's personal representatives (executors), in the same way as for other estate assets — not with the pension scheme administrator

Note: an earlier consultation proposal that would have made pension scheme administrators calculate and pay the IHT directly was dropped in the final legislation. Under the enacted rules, the personal representatives are liable for reporting and paying the IHT, though beneficiaries can direct the scheme to pay their share of the IHT from the pension funds if they wish.

Implementation and Confirmed Status

The Finance Act 2026 enacted the changes following a technical consultation conducted in 2025. The implementation date of 6 April 2027 is confirmed. Key points from the final legislation:

• Payment mechanism confirmed: Responsibility for reporting and paying the pension-related IHT rests with the deceased's personal representatives (executors), not the pension scheme administrator. (An earlier consultation proposal placing this duty on scheme administrators was dropped.) Beneficiaries may, if they choose, direct the scheme to settle their share of the IHT out of the pension funds. HMRC has published guidance on the valuation and payment process.
• Spousal and charity exemptions confirmed: Pension funds passing to a surviving spouse or civil partner, or to a registered charity, are exempt from IHT, consistent with other estate assets.
• Death in service benefits excluded: Lump sum death in service benefits under employer-sponsored group life schemes are excluded from the new IHT charge, as these are held under separate trust arrangements.
• Certain DB dependants' pensions excluded: Dependants' scheme pensions (regular income from a DB scheme) payable to a surviving spouse or dependant do not form part of the IHT calculation. Only unspent DC funds and certain lump sum death benefits are within scope.
• QROPS position: QROPS assets held by non-UK residents who meet the overseas residence test are outside the UK IHT framework and remain unaffected by the April 2027 changes, provided the overseas transfer charge conditions continue to be met.

Industry bodies raised practical concerns during consultation — particularly about the actuarial valuation of DB pension death benefits and the administrative burden on smaller scheme trustees. HMRC has provided transitional guidance to assist schemes with the implementation.

How the IHT Calculation Would Work

Under the enacted mechanism, the pension fund's value at death is added to the rest of the estate. IHT is then charged on the total estate (above the available nil-rate bands) at 40%. The deceased's personal representatives are responsible for reporting and paying the IHT due on the pension element, apportioned across the estate; beneficiaries may direct the scheme to pay their share of the IHT out of the pension funds.

The key nil-rate bands that still apply:

• The nil-rate band (NRB): £325,000 per person. Any estate below this threshold pays no IHT.
• The residence nil-rate band (RNRB): Up to £175,000 additional exemption where a residence is passed to direct descendants. This tapers above a £2m estate.
• The spousal exemption: Assets passing to a spouse or civil partner are free of IHT regardless of value, and unused nil-rate bands can be transferred to the surviving spouse on second death.

For many clients, these allowances mean the change has no practical impact. A couple with a pension pot of £200,000, a house worth £400,000 and other assets of £100,000 — a total estate of £700,000 — would typically use both nil-rate bands (£650,000 combined) and potentially the RNRB, resulting in little or no IHT even if the pension is included.

The clients most materially affected are those with total estates well above £1 million, particularly where a large proportion of the estate value is concentrated in a pension pot that has been deliberately preserved for inheritance.

Who Is Most Affected?

Large SIPP holders: Clients who have accumulated SIPPs of £500,000 or more, particularly those who have been deliberately not drawing from the SIPP in order to maximise the inheritance value, face the most significant change.

Clients who have been drawing from non-pension assets first: A common and previously rational strategy has been to draw income from ISAs, property and investments first, leaving the pension untouched for as long as possible. If the pension's IHT advantage is removed, the optimal drawdown sequencing changes.

Younger beneficiaries: A 45-year-old inheriting a £600,000 pension from a parent who died before 75 currently receives all of it tax-free. Under the new rules, 40% IHT may be charged on the portion above available nil-rate bands. The change disproportionately affects inheritors who are young enough to have benefited most from the tax-free growth.

Clients using the pension as a deliberate IHT shelter: Any client whose retirement income strategy has been explicitly built around preserving the pension for inheritance will need to review that strategy.

Planning Considerations Being Explored

The change has prompted a significant re-evaluation of retirement income strategies. Several approaches are being considered by advisers and clients:

Earlier pension drawdown: If the pension will eventually be taxed as part of the estate, drawing from it earlier and using the funds for living expenses, gifting or investment may reduce the estate's overall IHT exposure. However, pension income is subject to income tax, and withdrawing a large sum in a single year can push income into a higher tax band — so the comparison with potential future IHT is not always straightforward.

Using pension assets for spending rather than gifting from taxed assets: Some clients may find it more efficient to draw from the pension for day-to-day spending, while making gifts to family members from ISAs and investments (using the annual gifting allowances). This avoids large income tax hits while reducing other estate assets.

The pension for the spouse, non-pension assets for children: Where a couple has both pension assets and other assets, it may still make sense to direct the pension to the surviving spouse (who benefits from the spousal IHT exemption) and direct non-pension assets to children, minimising the overall IHT exposure across the full estate.

Pension contributions and trust structures: Some advisers are exploring whether paying pension assets into trust structures can preserve some of the estate planning benefits. This is complex territory, and the specific regulations — not yet finalised — will determine what is effective.

QROPS for international clients: For clients who are genuinely settled overseas, a properly structured QROPS transfer may place the pension assets outside the UK IHT framework entirely. This is a significant decision and requires detailed analysis, but it is a legitimate option for some clients.

Remaining Planning Considerations

The Finance Act 2026 has answered the key structural questions, but a number of planning considerations remain live:

• Transitional arrangements: The legislation addresses the position of pensions already in drawdown at 6 April 2027. In most cases, undrawn pension funds in a flexi-access drawdown arrangement remain within scope — the critical factor is whether funds are unspent at the date of death, not whether they have been designated to drawdown. Clients in drawdown with large unspent funds should review their income strategy accordingly.
• Spouses who are not long-term UK residents: Following the abolition of domicile-based IHT from April 2025, the spousal exemption may be restricted where the surviving spouse is not a long-term UK resident (broadly, UK resident for at least 10 of the last 20 tax years). Historically this cap was set at the nil-rate band (£325,000) for transfers to a non-UK-domiciled spouse; it can be lifted by election. For pension assets passing to such a spouse above the available exemption, IHT may be charged. Specialist international tax advice is essential in this scenario.
• Valuation of DB death benefits: For DB schemes that provide a lump sum death benefit (rather than, or in addition to, a dependant's pension), HMRC has confirmed that the gross value of the lump sum is used for IHT purposes, not an actuarial value of projected income. Schemes that provide only a dependant's scheme pension are outside scope.
• Income tax interaction: Inherited pension funds are currently subject to income tax in the beneficiary's hands only where the member died on or after age 75; where the member died before 75, the funds are generally received free of income tax. From April 2027, the pension funds are also brought within the IHT estate; where IHT is due, beneficiaries then also pay income tax on what they receive if the member died on or after 75 (death before 75 generally remains income-tax-free). This potential double-tax exposure — IHT at 40% followed by income tax at the marginal rate — is the single most significant change for high-value pension estates.

How Global Investments can help

For clients with significant pension assets, the confirmed April 2027 IHT changes represent one of the most important planning considerations of the current period. Our team has been modelling the impact for clients with large SIPP holdings and complex estate positions, and we are helping them work through the scenarios — from restructuring drawdown sequencing to consideration of QROPS for international clients, to reviewing Expression of Wishes and spousal pension arrangements.

We recommend that clients with total estates above £1 million, or pension pots above £300,000, discuss the implications with us now. The planning window before 6 April 2027 is narrowing, and some strategies — such as structured drawdown, spousal pension redirection, or QROPS for genuine overseas residents — require time to implement properly.

Please note that the information in this guide reflects the position as of June 2026 based on the Finance Act 2026 and HMRC implementation guidance available at that date. Rules may be subject to further clarification, and individual planning outcomes depend heavily on personal circumstances. This is not financial advice; always seek regulated advice tailored to your personal circumstances. The value of investments, including pension funds, can fall as well as rise.