From 6 April 2027, significant changes to the inheritance tax treatment of pensions are due to take effect. For many individuals and families, this could alter how wealth passes on death and increase the value of an estate for inheritance tax purposes.
For years, pensions have often played an important role in estate planning. In many cases, unused pension funds could be passed on outside the inheritance tax net, making them a useful way to preserve wealth for a spouse, children or other beneficiaries.
That position is changing. From April 2027, most unused pension funds and pension death benefits are expected to form part of a person’s estate for inheritance tax purposes. As a result, families who have planned on the basis of the current rules should now review their wills, pension nominations and wider estate planning arrangements.
For anyone concerned about inheritance tax, pensions, wills and pensions, or the wider impact of the IHT changes in 2027, this is the right time to take advice.
What is changing for pensions and inheritance tax from April 2027?
From 6 April 2027, most unused pension funds and pension death benefits will be included within the value of a person’s estate for inheritance tax purposes when they die.
In practical terms, this means pension wealth that may previously have sat outside the estate could now increase the value of the taxable estate. Where the estate exceeds the available inheritance tax thresholds, this may result in more inheritance tax becoming payable.
The standard rate of inheritance tax is 40% on the value above the available allowances, although the exact position will depend on the overall estate, any exemptions or reliefs that apply, and the identity of the beneficiaries.
This change is likely to affect many families who have treated pension savings as part of a long-term estate planning strategy. In some cases, a pension pot that was intended to pass efficiently to the next generation may now create an unexpected inheritance tax liability.
There are also likely to be practical implications for estate administration. Personal representatives will need to identify pension benefits, understand how they are treated for inheritance tax purposes, and ensure the relevant information is reported correctly. This may add complexity where there are multiple pension arrangements, different beneficiaries or limited liquid assets available to pay tax.
Inheritance tax thresholds to consider in your estate plan
The effect of the April 2027 changes will depend on the overall value of the estate, the available allowances and who is inheriting. The key inheritance tax thresholds, reliefs and allowances remain central to any review.
Nil rate band
Each individual has a nil rate band of £325,000. This is the amount that can usually pass free of inheritance tax before the 40% rate applies. This has been frozen since 2009 resulting in more estates coming within the inheritance tax net.
Residence nil rate band
There may also be an additional residence nil rate band of up to £175,000 where a qualifying home is left to direct descendants, such as children or grandchildren.
Transferable allowances for spouses and civil partners
Where allowances are not fully used on the first death, they may usually be transferred to the surviving spouse or civil partner. This means that, in some cases, a married couple or civil partners may be able to pass on up to £1 million free of inheritance tax, made up of two nil rate bands and two residence nil rate bands.
How the £2 million taper works
The residence nil rate band begins to reduce where an estate is worth more than £2 million. It tapers away at the rate of £1 for every £2 over that threshold. For an individual, this means the residence nil rate band can be lost altogether once the estate reaches £2.35 million.
This is one of the most important consequences of the pension changes. Bringing unused pension funds into the estate may push more families above key inheritance tax thresholds, reduce the available residence nil rate band, or remove it entirely.
Why the 2027 pension changes matter for estate planning
For many people, pensions have been an important part of a wider strategy for passing on wealth. Some individuals have chosen to use savings and investments during their lifetime while leaving pension wealth untouched, partly because pensions could often be passed on in a more inheritance tax-efficient way.
From April 2027, that planning may no longer deliver the result originally intended.
An unused pension pot could now increase the value of the estate for inheritance tax purposes. That may create an inheritance tax liability where none was previously expected or increase the tax payable on an estate that was already above the available thresholds.
The changes could also affect the balance between beneficiaries. A will may leave certain assets to one person, while pension death benefits are intended for someone else under a pension nomination. If the tax treatment of pensions changes, the overall outcome may no longer reflect the person’s wishes.
This does not mean pensions should automatically be drawn down or restructured. It does mean that existing arrangements should be reviewed carefully, taking legal, tax and financial advice where needed.
How the residence nil rate band could be reduced
The residence nil rate band is likely to be a key concern for many families.
Because this allowance starts to taper once the value of an estate exceeds £2 million, bringing pension wealth into the estate could cause some families to lose part or all of the allowance. This may be particularly relevant where the estate already includes a valuable home, savings, investments and other assets.
For families in London and the Southeast, where property values are often higher, the impact may be especially significant. A pension fund that was once outside the inheritance tax calculation could now push the estate beyond the taper threshold.
This is why the April 2027 reforms should not be viewed as a pension issue alone. They need to be considered as part of the wider estate planning picture.
How charitable gifts in wills could be affected
The changes may also have implications for charitable gifts in wills.
Where at least 10% of an estate is left to charity, the rate of inheritance tax on the taxable estate may be reduced from 40% to 36%. For some individuals, charitable giving forms part of both their personal wishes and their tax planning.
Once pensions are included in the estate for inheritance tax purposes, that calculation may become more complicated. In some cases, an estate that previously qualified for the reduced rate may no longer do so. In others, a formula-based charitable gift could produce a larger gift than originally intended because the estate value has increased.
This is particularly important where a will was drafted to achieve a specific tax result under the previous rules. A clause that worked well when pension wealth sat outside the estate may need to be reconsidered once pensions are brought within it.
Anyone who has included charitable gifts in a will should review whether the wording still reflects their intentions.
Why you should review your pension nominations now
A pension nomination, sometimes called an expression of wishes, tells pension trustees or providers who you would like to receive pension benefits after your death.
These nominations are often completed years earlier and may no longer reflect current circumstances. Marriage, divorce, separation, bereavement, the birth of children or grandchildren, or changes in family relationships can all make an old nomination inappropriate.
The forthcoming changes to inheritance tax make this an important time to review pension nominations alongside the will. Wills and pensions should be considered together as part of one coherent estate plan.
If a will and pension nomination point in different directions, that can lead to confusion, delay and potentially disputes. It can also produce an overall result that no longer matches the individual’s wishes.
What should you do before 6 April 2027?
With the changes due to take effect from 6 April 2027, now is the time to review your arrangements.
The first step is to build a clear picture of your estate. This should include:
- your home and any other property
- savings and investments
- business interests
- pensions
- life policies
- valuable personal assets
- debts and liabilities
- any significant lifetime gifts
Once the full picture is clear, you can assess whether your current arrangements still work as intended.
Questions worth considering include:
- Is your will up to date?
- Does it still reflect who you want to benefit?
- Have you reviewed your pension nominations recently?
- Could your pension fund push your estate over an inheritance tax threshold?
- Could the residence nil rate band be reduced or lost?
- Do charitable gifts in your will still work as intended?
- Will your executors have enough information to deal with your pensions and estate efficiently?
- Is there enough liquidity in the estate to meet any inheritance tax liability?
- Have your family, financial or personal circumstances changed since your will was prepared?
For some people, the answer may be a simple update to a will or pension nomination. For others, it may involve a broader review of how assets are held, how pension savings are used during lifetime and how wealth should pass on death.
Why professional advice matters
A solicitor can advise on your will, executors, trusts, succession planning and the legal structure of your estate. A financial adviser can advise on pension options, retirement income and investment strategy. In higher-value or more complex estates, specialist tax advice may also be needed.
The important point is that these issues should not be looked at in isolation. Decisions about pensions can affect inheritance tax. Decisions about wills can affect how assets pass between beneficiaries. Decisions about charitable gifts or lifetime gifting can change the tax position and alter the overall balance of the estate.
A joined-up review can help ensure your arrangements still reflect your wishes and remain appropriate once the new rules take effect.
Do not wait until April 2027
The April 2027 pension changes represent a significant shift in estate planning. Anyone who has relied on unused pension funds passing outside the inheritance tax net should not assume that existing arrangements will continue to work in the same way.
Reviewing your will, pension nominations and wider estate plan now can help reduce uncertainty, avoid unintended tax consequences and ensure your wishes are properly reflected.
RIAA Barker Gillette advises individuals and families on wills, inheritance tax planning, estate administration and succession planning. If you would like advice on how the April 2027 pension and inheritance tax changes may affect your arrangements, please contact our Private Client team.
About the Author
James McMullan is a Partner and also heads up our Private Client team. James started his career as a family lawyer, but over the years, his practice has grown to encompass all aspects of private client law, including estate planning, Inheritance Tax, lasting powers of attorney, lifetime gifts, living wills, mental capacity issues, probate and contentious probate, trusts and, of course, wills.
James prides himself on spending sufficient time with clients at the outset of a matter to fully understand their position, needs, and objectives. He is committed to resolving disputes effectively, frequently using alternative dispute resolution (ADR). Given its costs and uncertainty, court litigation is a last resort.