Pension Changes in 2027: How Will They Impact Inheritance Tax (IHT)

Major Pension and Inheritance Tax Changes Coming in 2027

From 6 April 2027, the UK government will introduce major reforms to pensions and Inheritance Tax (IHT). These changes could significantly affect how much of your pension passes to your loved ones when you die.

If you’ve always assumed your pension sits safely outside your taxable estate, it’s time to rethink your estate planning strategy.

What’s Changing from April 2027?

At present, most pensions are excluded from your estate for IHT purposes. That’s why many people rely on pensions as a tax-efficient way to preserve family wealth.

However, from 6 April 2027, the rules are changing:

• Unused pension funds and death benefits will now be included in your taxable estate.
• Any amount exceeding your Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) will be taxed at 40%.
• Pension scheme administrators will be responsible for reporting and paying IHT (subject to ongoing HMRC review).

There will still be limited exceptions, such as:

• Pensions already in payment to a dependant;
• Death-in-service benefits.

The key message: pensions will no longer automatically fall outside IHT.

Why This Matters for Your Estate

For many people, pensions are now their largest financial asset, often more valuable than property or investments. Including these within the taxable estate could easily push individuals above the IHT threshold.

And with tax-free allowances frozen until at least 2028, even more families will face unexpected inheritance tax bills.

Example:

Before April 2027

Jane dies with an estate worth £300,000 and a pension worth £200,000 (untouched).

• IHT applies to £300,000 only.
• This is below the £325,000 Nil Rate Band.
  No IHT to pay.

After April 2027

Jane’s £200,000 pension is now included.

• Total estate = £500,000.
• £325,000 is tax-free; £175,000 is taxed at 40%.
  £70,000 goes to HMRC instead of her family.

What You Should Do Now

It’s vital to plan early and not wait until 2027. Steps you can take now include:

1. Review your estate plan, ensure your strategy aligns with the upcoming rules.
2. Update pension nominations, confirm that your beneficiaries and intentions are current.
3. Explore other IHT mitigation tools – such as lifetime gifting, trusts, or insurance policies.
4. Take professional advice – withdrawing lump sums might create unnecessary income tax liabilities.

How Martin Tolhurst Solicitors Can Help

Our Private Client team specialises in estate planning, Wills and Inheritance Tax advice. With the 2027 rule changes fast approaching, we can help you:

• Understand how your pension fits into your wider estate;
• Minimise future IHT exposure; and
• Protect your wealth for future generations.

Get in touch today to arrange an estate review with one of our experienced solicitors.

We’ll help you make sure your pension benefits your loved ones, not HMRC.