Inheritance Tax on pensions from April 2027: what actually changes

For roughly two decades, a pension was the one thing you could pass on outside your estate. That is what ends. Nothing else about your pension changes: you can still save into it, still draw from it, still get the tax relief. It is only what happens on death that is different.

If your estate is comfortably below the threshold, this may not affect you at all. If it is not, the pension has just become the most expensive thing you own to pass on, and the planning is much easier to do now than in 2027.

Figures are correct at the date of review. Always check GOV.UK for the latest.

The rule, in plain terms

Today, if you die with money left in a pension, it usually sits outside your estate. Your beneficiaries may pay income tax on what they withdraw, depending on your age at death, but there is no Inheritance Tax on the pot itself.

From 6 April 2027, the unused pot is added to the value of your estate. If your estate is above the threshold, the pension is taxed at 40% like any other asset.

The thresholds for 2026/27, frozen until April 2031:

• Nil-rate band: £325,000 per person
• Residence nil-rate band: £175,000, if you leave a home to direct descendants
• A married couple can pass up to £1 million between them
• Everything above that: 40%

Your personal representatives, the people who administer your estate, will be responsible for reporting and paying the Inheritance Tax due on the pension. That is a real administrative burden landing on whoever you name as executor, and it is worth them knowing about it in advance.

The part that is being widely misreported

You may have seen headlines about combined tax rates of 67%, or even 87%, on inherited pensions.

Here is where those come from. If you die after age 75, your beneficiaries already pay income tax at their own marginal rate on whatever they withdraw from the inherited pension. That rule is not new and it is not changing. Stack a 40% Inheritance Tax charge on top of that income tax, and you can construct some alarming arithmetic.

But the draft regulations provide relief against exactly that. Income tax will not be charged on the portion of the death benefit equivalent to the Inheritance Tax paid on it. The two taxes are not simply piled on top of one another.

So the position is serious, and it is worth planning for. It is not the catastrophe some of the coverage suggests, and anyone using an 87% figure to sell you something is not being straight with you.

One honest caveat: the detailed rules are still in draft. The direction of travel is settled and the April 2027 date is confirmed, but the fine print may yet move. That is a reason to plan sensibly and review, not a reason to do something drastic today.

What is not affected

Worth knowing before you worry:

Anything left to your spouse or civil partner. The spousal exemption survives. A pension passing to a surviving spouse remains exempt from Inheritance Tax, as it is today. That defers the problem rather than removing it, because it will sit in their estate, but it is not taxed on the first death.

Anything left to charity. The charity exemption is retained.

Death in service benefits from a registered pension scheme. These are excluded. If you die while still employed and your scheme pays a lump sum to your family, that is outside the Inheritance Tax net.

Your pension while you are alive. Nothing changes about contributions, tax relief, or how you draw it.

Who this actually catches

The people most exposed are not necessarily the wealthiest. They are the ones who did exactly what they were told to do.

For twenty years the standard advice was: leave the pension untouched for as long as possible, and spend everything else first. It was sound advice, because the pension was outside your estate and everything else was inside it.

From April 2027, that logic inverts for a lot of people.

Take a business owner, 64, with a house worth £450,000, savings and investments of £250,000, and a £600,000 pension they have deliberately never touched because that is what their adviser told them to do. Married, planning to leave everything to their two children.

Under today's rules, the pension passes outside the estate. From April 2027, it does not. On an estate already above the threshold, that £600,000 could carry £240,000 of Inheritance Tax that simply did not exist before.

Nothing about that person's business, savings or intentions has changed. They did not get richer. They followed the advice they were given. Only the rules moved.

What you can sensibly do

There is no clever scheme here, and anybody offering you one should be treated with suspicion. What there is, is a set of decisions that are far easier while you have time.

Work out your number. Most people have never had their estate valued properly, including the pension, the property, the business and any life policies. You cannot plan around a figure you do not know, and quite often the figure itself is the surprise.

Revisit the "spend the pension last" assumption. For many people, drawing on the pension earlier, and using it, gifting from it, or spending it before other assets, will now be the more sensible order. This needs modelling against your actual income tax position. It is not automatically right, and it is not automatically wrong.

Check your death benefit nomination. Who is currently named on your pension? Is it still who you would choose? Does it still make sense given the spousal exemption? This is a form that takes ten minutes and is frequently years out of date.

Look at gifting. Regular gifts out of surplus income, the annual exemption, and the seven-year rule all still work. Unspectacular, and effective, and better started early.

Consider life cover written in trust. A policy that pays out into trust sits outside your estate and can be used to fund the Inheritance Tax bill, so your family are not forced to sell the business or the house to pay it. This is old, well-established planning, and it is about to matter to a lot more people.

Do not do anything drastic on the strength of draft rules. Stripping a pension out in a panic can cost you more in income tax than you save in Inheritance Tax. Model it first.

What we would do

We would start by valuing your estate properly, including the pension and the business, and showing you what would be payable today and what would be payable under the 2027 rules. Two numbers, side by side.

Then we would model the options honestly, and tell you which ones are worth the complexity and which are not.

And if it turns out you have nothing to worry about, we will tell you that, and you can go back to running your business.