For many years, pensions have been one of the most tax-efficient assets to pass on to future generations. Financial advisers have often encouraged clients to spend other assets first and preserve their pension for as long as possible because, in many circumstances, pension funds sat outside the estate for inheritance tax (IHT) purposes.
That position is changing significantly.
From 6 April 2027, most unused pension funds and pension death benefits will be included within a deceased person's estate for inheritance tax purposes. This represents one of the biggest changes to estate planning in decades and could have a substantial impact on families who have accumulated significant pension wealth.
What Is Changing?
Under the current rules, most defined contribution pensions can usually be passed to beneficiaries without forming part of the deceased's estate for inheritance tax calculations.
From 6 April 2027, most unused pension funds and pension death benefits will be included when calculating the value of an estate for inheritance tax purposes. The changes were confirmed through legislation and apply to deaths occurring on or after that date.
Importantly, it is the date of death that determines which rules apply. If someone dies before 6 April 2027, the current rules generally continue to apply even if benefits are paid after that date.
Why This Matters
For many affluent families, pensions have effectively become an intergenerational wealth planning vehicle.
A client with:
- £1 million in a pension
- £1 million of other assets
- An estate already exceeding their available allowances
could see a significantly larger inheritance tax liability after April 2027 than under the current regime.
In simple terms, pension wealth may no longer enjoy the same inheritance tax advantages that have existed for many years.
The Risk of Double Taxation
One of the most important areas to understand is the interaction between inheritance tax and income tax.
The age 75 rule remains relevant.
Death before age 75
Generally, beneficiaries can still inherit pension funds without paying income tax on withdrawals, subject to the applicable allowances and rules.
Death after age 75
Beneficiaries typically pay income tax at their own marginal rate when drawing inherited pension funds.
This creates the potential for:
- Inheritance tax on the pension fund.
- Income tax when beneficiaries subsequently withdraw money.
For higher-rate taxpayers, the combined effect can be substantial and could dramatically reduce the amount ultimately received by the family.
What Is Not Changing?
There are several important exceptions and protections.
Spouse and Civil Partner Exemption
Assets left to a spouse or civil partner generally remain exempt from inheritance tax under existing rules.
As a result, many married couples may not see an immediate inheritance tax charge on first death, although planning will still be important for the surviving spouse's estate.
Death-in-Service Benefits
Death-in-service benefits paid from registered pension schemes are expected to remain outside the inheritance tax calculation.
Five Things Investors Should Be Careful Of
1. Assuming Your Pension Is Still "Outside the Estate"
Many people have not reviewed their estate planning since the announcement of these changes.
Advice that was perfectly reasonable five years ago may no longer produce the best outcome after April 2027.
A pension preservation strategy that once reduced inheritance tax could become significantly less effective.
2. Outdated Expression of Wish Forms
Most pension providers allow you to complete a beneficiary nomination or expression of wish form.
Many clients completed these years ago and have never revisited them.
Marriage, divorce, births, deaths and changing family circumstances can all make historic nominations inappropriate.
Now is an excellent time to review beneficiary instructions.
3. Drawing Too Little Pension Income
Historically, many retirees deliberately spent ISAs, cash deposits and general investments before touching their pension.
That strategy may no longer be optimal.
In some circumstances, drawing pension income earlier, paying some income tax during lifetime and gifting surplus wealth could prove more efficient than leaving a large pension fund exposed to inheritance tax. This requires personalised advice and careful modelling.
4. Ignoring the Seven-Year Rule
Lifetime gifting may become more attractive for some clients.
However, many gifts remain potentially exempt transfers and may require the donor to survive seven years before falling fully outside the estate.
Leaving planning too late reduces available options.
5. Failing to Coordinate Retirement and Estate Planning
Retirement planning and inheritance tax planning can no longer be viewed separately.
Questions such as:
- Should I draw from my pension or ISA?
- Should I purchase an annuity?
- Should I gift surplus income?
- Should I establish a trust?
- Which assets should I leave to children?
are now more interconnected than ever.
A strategy designed purely to minimise income tax may not minimise inheritance tax.
Actions to Consider Now
While every situation is different, most investors should consider the following before April 2027:
Review Your Pension Beneficiary Nominations
Ensure wishes reflect current family circumstances.
Obtain an Estate Value Calculation
Understand whether inheritance tax is actually likely to be payable.
Reassess Retirement Income Strategy
The traditional "spend everything else before touching the pension" approach may no longer be the best answer.
Consider Lifetime Gifting
Where affordable, gifting strategies may help reduce future inheritance tax exposure.
Seek Professional Advice
The interaction of income tax, inheritance tax, pension legislation and estate planning has become considerably more complex.
Final Thoughts
The inclusion of most pension death benefits within inheritance tax calculations from 6 April 2027 represents a major shift in UK financial planning. While pensions remain extremely valuable retirement vehicles, the longstanding assumption that they are the "last asset to spend" may no longer hold true for many families.
Rather than waiting until the rules take effect, investors should use the period before April 2027 to review beneficiary nominations, retirement income strategies and estate plans. For some families, a few proactive adjustments now could save significant tax and ensure more wealth reaches future generations in the way intended.
This article does not constitute tax, legal or financial advice and should not be relied upon as such. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
This article is provided for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial product. For guidance, seek professional advice.