Your Pension and Inheritance Tax: The Big Change Coming in 2027

From April 2027, pensions will no longer be exempt from inheritance tax. If you've been relying on your pension as a tax-free way to pass on wealth, the rules are about to change significantly.

For years, pensions have been one of the most powerful inheritance tax planning tools in the UK. Money left in a pension at death could be passed to beneficiaries completely free of IHT, making pensions not just a retirement savings vehicle but a wealth transfer strategy. The government has announced that this is ending. From April 2027, pension pots will be included in your estate for inheritance tax purposes. Here's what that means, who it affects, and what you can do about it now.

What's changing with pensions and inheritance tax?

Currently, if you die with money left in your pension, it passes to your nominated beneficiaries outside of your estate. That means it doesn't count toward the inheritance tax calculation, and your beneficiaries receive it tax-free (if you die before 75) or pay income tax on withdrawals (if you die after 75). Either way, no inheritance tax applies.

From 6 April 2027, pension funds will be brought into your estate for IHT purposes. If your total estate, including your pension, exceeds the nil-rate band (currently £325,000, or up to £500,000 with the residence nil-rate band), inheritance tax at 40% will apply to the excess.

Pensions were the last great IHT shelter. That door is closing, and it's closing sooner than most people realise.

Who does this actually affect?

This change primarily affects people whose total estate, including their pension pot, exceeds the inheritance tax thresholds. The standard nil-rate band is £325,000. If you own a home and leave it to direct descendants, you may also get the residence nil-rate band of £175,000, giving a combined threshold of £500,000 per person (or £1 million for a married couple or civil partners).

If your estate is well below these thresholds even with your pension included, this change won't affect you directly. But if you own a home in the South East, have savings, and a decent pension pot, the numbers add up quickly. A home worth £350,000, savings of £100,000, and a pension worth £200,000 gives you an estate of £650,000 - already above the individual threshold.

Why did people use pensions for inheritance tax planning?

The strategy was straightforward: if you had other income sources in retirement (state pension, rental income, other savings), you could leave your defined contribution pension untouched. By not drawing it down, the pot stayed outside your estate and could pass to your children or grandchildren without any IHT. Some people deliberately spent other assets first and kept their pension intact specifically for this reason.

This approach was entirely legal and widely recommended by financial advisers. The upcoming change means this strategy no longer works from April 2027 onward.

Should you start drawing down your pension before April 2027?

This is where it gets nuanced. Drawing down your pension to reduce its value for IHT purposes might seem logical, but it creates other tax consequences. Pension withdrawals count as income and are taxed at your marginal rate. If you withdraw large amounts, you could push yourself into higher tax brackets, potentially paying 40% or 45% income tax on the withdrawals.

There's also the question of what you do with the money once you've withdrawn it. If it sits in a bank account, it's still part of your estate. To genuinely reduce your IHT exposure, you'd need to give it away (and survive seven years for it to be fully exempt) or spend it.

For most people, the answer isn't to rush into withdrawals. It's to review your overall estate plan and consider whether your pension is still the right place for money you intended to pass on.

Don't make a tax decision in panic. The change is a year away - that's time to plan properly, not time to act rashly.

What are the alternatives for passing on wealth tax-efficiently?

With pensions losing their IHT advantage, other strategies become more important:

  • Gifting during your lifetime: You can give away up to £3,000 per year free of IHT immediately. Larger gifts become exempt after seven years. Regular gifts from surplus income (money you don't need for your living costs) are immediately exempt with no seven-year rule.

  • ISA investments for growth: While ISAs are included in your estate for IHT, they grow tax-free during your lifetime. Using ISAs to invest and then gifting from ISA withdrawals can be an effective combined approach.

  • Life insurance in trust: A life insurance policy written in trust pays out directly to your beneficiaries outside your estate. This can provide cash to cover an expected IHT bill without your family having to sell assets.

  • Spending it: This sounds obvious, but many people under-spend in retirement out of habit or caution. If you have more than enough, using your pension to fund experiences, help your children with house deposits now, or simply enjoy your retirement is the most tax-efficient approach of all. You can't be taxed on money you've spent.

What should you do right now?

First, calculate the rough value of your total estate including your pension. If it's comfortably below the IHT thresholds, this change may not affect you. If it's borderline or above, it's worth speaking to a financial adviser about your options.

Second, review your pension nominations. Make sure your pension provider has up-to-date details of who you want to inherit your pot. This doesn't change the IHT position, but it ensures your wishes are followed.

Third, if you have surplus income, consider whether regular gifting could reduce your estate over time. This is one of the most underused IHT planning tools available.

Where Mona Fits

While this change affects pensions specifically, it makes your ISA even more valuable as part of your overall financial plan. Mona's Stocks and Shares ISA grows completely tax-free during your lifetime, meaning more of your money compounds without being eroded by tax. If you're rethinking your retirement and wealth transfer strategy in light of the pension IHT changes, building wealth inside an ISA is one of the smartest moves you can make alongside your pension contributions.

The Bottom Line

From April 2027, pensions will be included in your estate for inheritance tax. This ends one of the most powerful wealth transfer strategies available to UK investors. The change doesn't mean you should panic or rush to empty your pension, but it does mean your estate plan needs reviewing. Consider lifetime gifting, insurance in trust, and making the most of your ISA allowance alongside your pension. The people who plan now will pay significantly less tax than those who wait.

Review your estate plan now. Start building tax-free wealth alongside your pension with Mona's ISA.

For impartial information and guidance on inheritance tax and pension planning, visit MoneyHelper.org.uk.

Join Mona’s early access waitlist

Join the waitlist

All articles

Your Pension and Inheritance Tax: The Big Change Coming in 2027

From April 2027, pensions will no longer be exempt from inheritance tax. If you've been relying on your pension as a tax-free way to pass on wealth, the rules are about to change significantly.

For years, pensions have been one of the most powerful inheritance tax planning tools in the UK. Money left in a pension at death could be passed to beneficiaries completely free of IHT, making pensions not just a retirement savings vehicle but a wealth transfer strategy. The government has announced that this is ending. From April 2027, pension pots will be included in your estate for inheritance tax purposes. Here's what that means, who it affects, and what you can do about it now.

What's changing with pensions and inheritance tax?

Currently, if you die with money left in your pension, it passes to your nominated beneficiaries outside of your estate. That means it doesn't count toward the inheritance tax calculation, and your beneficiaries receive it tax-free (if you die before 75) or pay income tax on withdrawals (if you die after 75). Either way, no inheritance tax applies.

From 6 April 2027, pension funds will be brought into your estate for IHT purposes. If your total estate, including your pension, exceeds the nil-rate band (currently £325,000, or up to £500,000 with the residence nil-rate band), inheritance tax at 40% will apply to the excess.

Pensions were the last great IHT shelter. That door is closing, and it's closing sooner than most people realise.

Who does this actually affect?

This change primarily affects people whose total estate, including their pension pot, exceeds the inheritance tax thresholds. The standard nil-rate band is £325,000. If you own a home and leave it to direct descendants, you may also get the residence nil-rate band of £175,000, giving a combined threshold of £500,000 per person (or £1 million for a married couple or civil partners).

If your estate is well below these thresholds even with your pension included, this change won't affect you directly. But if you own a home in the South East, have savings, and a decent pension pot, the numbers add up quickly. A home worth £350,000, savings of £100,000, and a pension worth £200,000 gives you an estate of £650,000 - already above the individual threshold.

Why did people use pensions for inheritance tax planning?

The strategy was straightforward: if you had other income sources in retirement (state pension, rental income, other savings), you could leave your defined contribution pension untouched. By not drawing it down, the pot stayed outside your estate and could pass to your children or grandchildren without any IHT. Some people deliberately spent other assets first and kept their pension intact specifically for this reason.

This approach was entirely legal and widely recommended by financial advisers. The upcoming change means this strategy no longer works from April 2027 onward.

Should you start drawing down your pension before April 2027?

This is where it gets nuanced. Drawing down your pension to reduce its value for IHT purposes might seem logical, but it creates other tax consequences. Pension withdrawals count as income and are taxed at your marginal rate. If you withdraw large amounts, you could push yourself into higher tax brackets, potentially paying 40% or 45% income tax on the withdrawals.

There's also the question of what you do with the money once you've withdrawn it. If it sits in a bank account, it's still part of your estate. To genuinely reduce your IHT exposure, you'd need to give it away (and survive seven years for it to be fully exempt) or spend it.

For most people, the answer isn't to rush into withdrawals. It's to review your overall estate plan and consider whether your pension is still the right place for money you intended to pass on.

Don't make a tax decision in panic. The change is a year away - that's time to plan properly, not time to act rashly.

What are the alternatives for passing on wealth tax-efficiently?

With pensions losing their IHT advantage, other strategies become more important:

  • Gifting during your lifetime: You can give away up to £3,000 per year free of IHT immediately. Larger gifts become exempt after seven years. Regular gifts from surplus income (money you don't need for your living costs) are immediately exempt with no seven-year rule.

  • ISA investments for growth: While ISAs are included in your estate for IHT, they grow tax-free during your lifetime. Using ISAs to invest and then gifting from ISA withdrawals can be an effective combined approach.

  • Life insurance in trust: A life insurance policy written in trust pays out directly to your beneficiaries outside your estate. This can provide cash to cover an expected IHT bill without your family having to sell assets.

  • Spending it: This sounds obvious, but many people under-spend in retirement out of habit or caution. If you have more than enough, using your pension to fund experiences, help your children with house deposits now, or simply enjoy your retirement is the most tax-efficient approach of all. You can't be taxed on money you've spent.

What should you do right now?

First, calculate the rough value of your total estate including your pension. If it's comfortably below the IHT thresholds, this change may not affect you. If it's borderline or above, it's worth speaking to a financial adviser about your options.

Second, review your pension nominations. Make sure your pension provider has up-to-date details of who you want to inherit your pot. This doesn't change the IHT position, but it ensures your wishes are followed.

Third, if you have surplus income, consider whether regular gifting could reduce your estate over time. This is one of the most underused IHT planning tools available.

Where Mona Fits

While this change affects pensions specifically, it makes your ISA even more valuable as part of your overall financial plan. Mona's Stocks and Shares ISA grows completely tax-free during your lifetime, meaning more of your money compounds without being eroded by tax. If you're rethinking your retirement and wealth transfer strategy in light of the pension IHT changes, building wealth inside an ISA is one of the smartest moves you can make alongside your pension contributions.

The Bottom Line

From April 2027, pensions will be included in your estate for inheritance tax. This ends one of the most powerful wealth transfer strategies available to UK investors. The change doesn't mean you should panic or rush to empty your pension, but it does mean your estate plan needs reviewing. Consider lifetime gifting, insurance in trust, and making the most of your ISA allowance alongside your pension. The people who plan now will pay significantly less tax than those who wait.

Review your estate plan now. Start building tax-free wealth alongside your pension with Mona's ISA.

For impartial information and guidance on inheritance tax and pension planning, visit MoneyHelper.org.uk.

Join Mona’s early access waitlist

Join the waitlist

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