Inheritance tax (IHT) has gone mainstream. Once reserved for the landed gentry, a combination of inflation, high property prices, and frozen allowances means that anyone with more than £325,000 in their estate risks leaving loved ones with a tax bill.
Estate planning is the art of structuring and managing how the wealth you leave behind is passed on so it benefits your family rather than the taxman.
But this is becoming more complex. For decades, pensions have been a cornerstone of estate planning, offering a highly tax-efficient way to pass on wealth. Now, that’s changing.
The Current Landscape: Pensions as a Tax Shelter
Under current rules, defined contribution pensions typically fall outside of the taxable estate.
- If someone dies before age 75, beneficiaries can inherit pension funds tax-free.
- If death occurs after 75, income tax may apply on withdrawals, but the funds are not counted toward IHT.
This has led many people to leave pension pots untouched, allowing them to grow and then pass on without triggering the 40% IHT charge.
What’s Changing in 2027?
From 6th April 2027, unused pension funds will be included in the value of a deceased person’s estate for IHT purposes. That means:
- Pension pots may face up to 40% tax if the estate exceeds the IHT threshold
- The nil-rate band (£325,000) remains frozen until at least 2030, so more estates will be caught once pensions are included
- Personal Representatives (PRs), not pension scheme administrators, will be responsible for paying IHT on pension funds
This change could bring thousands of additional estates into the IHT net.
Why It Matters
For many middle-income families, this is more than a technical adjustment. It could mean a major rethink in how wealth is passed down.
A pension pot of £300,000, once outside of IHT, could now push an estate over the threshold.
If your estate plan assumes pensions will remain outside IHT, it may no longer be fit for purpose.
What you could consider doing now
- Consider drawing down pensions earlier: Using pension funds during retirement may reduce the taxable amount later
- Explore lifetime giving: Gifting assets during your lifetime can reduce the size of your estate (subject to the seven-year rule)
- Maximise spousal exemptions: Transfers between spouses or civil partners remain exempt from IHT. Coordinated estate planning can help
- Look into trusts: Trusts can sometimes help manage assets outside the estate, though they carry their own rules and implications
- Review your estate plan: Speak to a financial adviser to reassess your strategy in light of the pension rule changes
A Wake-Up Call for Wealth Planning
This isn’t just a pension issue; it’s a broader reminder to revisit how we think about intergenerational wealth.
The 2027 changes are about more than tax: they’re about legacy, security, and ensuring your intentions are honoured. Estate planning can no longer be “set and forget” and your strategy needs to evolve as the rules do.
To find out how to prepare for a future where pensions may no longer be a safe haven, speak to us at Continuum today.
Inheritance Tax on unused pension funds and death benefits – GOV.UK
The information contained in this article is based on the opinion of Continuum and does not constitute advice on a suitable taxation strategy or investment strategy, you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate taxation and trust advice or will writing.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken. Pension savings are at risk of being eroded by inflation.
Accessing pension benefits early is not suitable for everyone. You should seek advice to understand your options at retirement.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
