Pensions and Inheritance Tax: What the April 2027 Changes Mean for You

For years, pensions have been one of the most tax-efficient ways to pass on wealth. Unused pension pots could be inherited free of inheritance tax, making them a powerful estate planning tool. That is all changing from April 2027, and the impact could be significant for many families.

The Current Rules (Until April 2027)

Under the current rules, pension pots are not included in your estate for inheritance tax (IHT) purposes. This means that if you die with £500,000 in your SIPP, that money passes to your beneficiaries without any IHT being due.

If you die before age 75, your beneficiaries can withdraw the entire pot tax-free. If you die after 75, they pay income tax on withdrawals at their marginal rate, but there is still no inheritance tax.

This has made pensions a popular estate planning strategy. People who could afford it would spend other assets first in retirement and preserve their pension pot to pass on to the next generation tax-free.

What Changes in April 2027

From April 2027, unused pension pots will be included in your estate for IHT purposes. This is a major change announced in the Autumn Budget 2024. The full details are in the government's consultation document.

In practice, this means that if your total estate (including your pension) exceeds the IHT nil-rate band of £325,000 (plus the residence nil-rate band of £175,000 if applicable), your beneficiaries could face a 40% IHT charge on the excess, including the pension pot.

Who Will Be Affected?

Anyone with a combined estate and pension worth more than £325,000 (or £500,000 with the residence nil-rate band) could be affected. For married couples and civil partners, the combined threshold can be up to £1,000,000 before IHT kicks in, because the unused allowance of the first spouse to die transfers to the surviving spouse.

To put this in context, if you own a home worth £350,000 and have a pension pot of £300,000, your total estate is £650,000. Under the new rules, the pension would be included, potentially pushing you above the IHT threshold.

Practical Implications

This change means that the strategy of preserving your pension pot and spending other assets first may no longer be as effective. Some people may now choose to draw down their pension during their lifetime rather than leaving it untouched.

However, this needs careful thought. Withdrawing more from your pension means paying income tax on those withdrawals. The question becomes whether paying income tax at 20% or 40% during your lifetime is better than your beneficiaries paying IHT at 40% after your death. The answer depends on your specific circumstances and marginal tax rates.

For parents and grandparents considering gifts during their lifetime, paying into a child's pension is another possibility to understand. My Junior SIPP guide covers gifts from relatives and the inheritance-tax rules alongside the practical drawback: the child cannot use that money until pension access age.

What You Can Do Now

Review your overall estate and pension to understand whether you might be affected. If your combined estate and pension could exceed the IHT thresholds, consider speaking to a financial adviser about your options.

Think about whether it makes sense to adjust your drawdown strategy. Taking a slightly higher income from your pension during retirement could reduce the IHT liability on your estate, while also giving you a better standard of living.

Consider using some pension income to make gifts during your lifetime. Regular gifts from income are exempt from IHT if they come from surplus income (income you do not need for your normal living expenses).

Review your life insurance arrangements. An appropriate life insurance policy written in trust could help your beneficiaries meet any IHT liability without needing to access the pension pot immediately.

The Bottom Line

The April 2027 changes make pensions less attractive as an estate planning tool, but they remain one of the most tax-efficient ways to save for your own retirement. Tax relief on contributions, tax-free growth, and the 25% tax-free lump sum are all unchanged.

The key takeaway is that pension planning and estate planning now need to be considered together, rather than separately. Use our [SIPP calculator](/) to project your pension value and factor it into your overall financial planning.