Pensions and Inheritance Tax: What Families Need to Consider Before April 2027
From 6 April 2027, the Inheritance Tax treatment of pensions will change significantly. Most unused pension funds and pension death benefits will be brought within the value of an individual’s estate for Inheritance Tax purposes.
For families who have previously considered pensions separately from their estate, the change creates a reason to review how pension wealth fits alongside property, investments and other assets.
It does not mean that every pension will become subject to Inheritance Tax, or that every estate will face a higher tax bill. It does mean that pension and estate planning will need to be considered more closely together.
What is changing in April 2027?
Under the new rules, most unused pension funds and pension death benefits will be included when calculating an estate’s value for Inheritance Tax from 6 April 2027.
This changes the position for pension benefits that currently sit outside an individual’s estate for Inheritance Tax purposes.
There are exceptions. Death-in-service benefits payable from registered pension schemes will remain outside the scope of the new rules. Certain dependants scheme pensions from defined benefit arrangements and collective money purchase arrangements are also excluded.
The change applies to deaths occurring on or after 6 April 2027.
Why does this matter for estate planning?
For some families, an unused pension can represent a substantial part of overall wealth.
Bringing that value into the estate may therefore affect whether Inheritance Tax is payable and, where an estate is already taxable, the amount of tax due.
The standard Inheritance Tax nil-rate band is currently £325,000. An additional residence nil-rate band of up to £175,000 may be available where a qualifying residence is left to direct descendants, subject to the relevant conditions. The residence nil-rate band begins to taper where the net value of an estate exceeds £2 million.
Including pension wealth within the estate could therefore have consequences beyond simply adding the pension to the value on which Inheritance Tax is considered. For some larger estates, it may also affect the availability of the residence nil-rate band.
This makes it important to look at the estate rather than considering the pension in isolation.
How significant could the change be?
HMRC expects most estates to remain outside the scope of Inheritance Tax after the reforms.
Its estimates nevertheless indicate that around 10,500 estates with inheritable pension wealth could become liable for Inheritance Tax in 2027/28 where they would not previously have had a liability. A further 38,500 estates are expected to pay more Inheritance Tax than under the existing rules.
HMRC estimates the average increase in Inheritance Tax liability for affected estates could be around £34,000, although its projections do not account for changes people may make to their financial planning before the rules take effect.
The effect on an individual estate will depend on its value, the pension arrangements involved, available exemptions and allowances, and who ultimately receives the assets.
Who will deal with the Inheritance Tax?
The practical administration of the change is also important.
Personal representatives will be responsible for reporting pension assets and paying any Inheritance Tax due. Pension scheme administrators, personal representatives and beneficiaries will need to exchange information so that the pension can be valued and the appropriate tax calculated.
HMRC has been developing the procedures needed to make this work. Regulations laid in July 2026 set out information-sharing requirements between pension providers, personal representatives, beneficiaries and HMRC.
There will also be mechanisms to help with paying tax from pension benefits. Where personal representatives reasonably expect Inheritance Tax to be due, they will be able to instruct a pension scheme administrator to withhold part of the taxable benefits while the liability is established and, where appropriate, pay tax directly to HMRC.
HMRC is expected to provide further guidance before implementation.
Does this mean pensions should be drawn down before 2027?
Not necessarily.
A change in tax treatment should not, on its own, determine how or when someone uses their pension.
Pensions are primarily intended to provide for retirement. Decisions about taking benefits need to take into account income requirements, other assets, tax implications, and longer-term financial objectives.
Drawing more from a pension purely to reduce the amount remaining at death could create different tax consequences or leave less capital available later in retirement.
The right approach depends on individual circumstances.
What should families be considering now?
April 2027 may still appear some way off, but the change provides an opportunity to review existing arrangements before the new rules take effect.
That review should start with understanding the overall position: the value and type of pension arrangements held, other investments and assets, expected retirement income requirements and the likely value of the estate.
Review existing beneficiary nominations as part of the wider pension arrangements. The new Inheritance Tax rules do not remove the importance of considering who is intended to receive pension benefits.
For couples and families with larger estates, it may also be necessary to consider how pension assets interact with existing estate planning and the available Inheritance Tax allowances.
This is where taking a broader approach to financial advice becomes important. Pension decisions cannot be considered solely in terms of Inheritance Tax; they also need to account for retirement income, investments, other assets, and longer-term financial objectives.
The objective should not simply be to reduce a future tax bill. Any changes need to make sense within the individual’s retirement plans and wider financial position.
Bringing Pension and Estate Planning Together
The April 2027 reforms change an important assumption that has influenced pension and estate planning for many years.
For some families, the effect may be limited. For others, particularly where significant pension wealth has accumulated alongside property and investments, the change could materially alter the value of the estate considered for Inheritance Tax.
This makes it increasingly important to consider pensions, investments, retirement income and the transfer of wealth as connected parts of the same financial plan.