From April 2027, the way pensions are treated for Inheritance Tax (IHT) is changing, and it could significantly affect how much wealth you’re able to pass on to loved ones.
This article explains what’s changing, why it matters, and what you can do now; especially if you have pension funds that are surplus to your own retirement needs.
What’s changing? And What was announced recently?
The government first announced changes in Autumn 2024, and draft legislation has now been published (July 2025). While it’s not yet law, there’s currently no indication that the policy will be reversed. So, it’s wise to plan ahead.
From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of your estate for IHT purposes. This marks a significant shift from the current rules, where many pension death benefits fall outside the scope of IHT.
- Unused pension funds and death benefits will be included in your estate for IHT purposes.
- Executors (not pension providers) will be responsible for reporting and paying any IHT due.
- Pension providers must supply information such as the value of the pension within four weeks of being notified of a death.
This means that pension wealth could be taxed at 40% IHT, and in some cases, income tax may also apply when beneficiaries access the funds — potentially reducing the value passed on significantly. Please note tax treatment depends on your individual circumstances and maybe be subject to change in the future.
How many people will this affect?
You don’t need to be a millionaire to be affected. Based on the government estimations in their recent policy paper1 (dated 21 July 2025):
- Nearly 1 in 4 estates with pension wealth will face higher IHT.1
- 10,500 families will pay IHT for the first time — simply because their pension is now included.
- The average increase in IHT liability is projected to be around £34,000 per affected estate.
If you have a defined contribution pension and property wealth, you could easily exceed the IHT threshold — even if you don’t think of yourself as “wealthy”.
Why does this matter?
For many people, pensions have been seen as a tax-efficient way to pass on wealth. These changes mean that pensions may no longer offer the same IHT advantages — especially if you have a large unspent pension pot.
This doesn’t mean pensions are no longer valuable — far from it. But it does mean that estate planning strategies may need to be reviewed.
What should you consider?
Here are a few practical steps you might want to take:
- Review your estate plan: If you were relying on pensions to pass on wealth tax-free, it may be time to revisit your strategy.
- Check your beneficiary nominations: Make sure your pension provider has up-to-date details of who you want to receive your pension benefits. With the changes from April 2027, it’s possible that your nominations may need changing.
- Understand the impact on your family: Executors will have more responsibility, and delays in estate administration could occur if information isn’t shared promptly. You may want to think about how many pensions you have, and whether these can be combined.
What’s not changing?
Transfers to spouses and civil partners remain exempt from IHT, so in many cases, the immediate impact may be limited. But for those planning to pass wealth to children or other beneficiaries, the new rules could make a difference.
What can you do now?
If you’re confident that part of your pension is surplus to your own needs, there are steps you can take to reduce the impact of these changes. The suitability of the following planning options depends on your personal circumstances.
- Spend It
Enjoy your retirement more now (if you can afford it), knowing that spending surplus funds reduces the size of your estate.
Example: A client with a £600k pension and modest spending needs, increases drawdown to fund travel and home improvements, reducing the pot gradually and lowering future IHT exposure.
- Gift It
Gifting from pension drawdown can reduce your estate. Gifts may be exempt if within allowances or fall outside your estate after seven years. There’s lots of ways to gift, with some options allowing you to retain control.
Example: A client gifts £3,000 annually to each child — within the annual exemption — helping them now while reducing the estate.
The gift could be combined with you making a pension contribution on your child’s behalf, helping to secure their future.
- Insure It
Whole-of-life insurance can be used to cover the expected IHT bill, ensuring beneficiaries receive the full value of your estate.
Example: A client with a £200k surplus pension takes out a whole-of-life policy in trust to cover the potential £80k IHT liability (40% of £200k), funded from pension income.
- Exempt It — move your pension into a higher risk investment
For clients with surplus pension wealth who are comfortable taking additional risk, one option is to withdraw funds and invest in assets that qualify for Business Relief (BR). These can be exempt from IHT after two years, provided certain conditions are met.
Example: A client withdraws £100,000 from their pension and invests in a BR-qualifying portfolio. After two years, the value of that investment may be outside their estate for IHT purposes — potentially saving £40,000 in tax.
As a BR qualifying portfolio carries additional risk, it is not suitable for everyone, and the risks must be carefully considered. But for some, it can be a powerful way to reduce IHT while keeping the funds invested.
You should seek advice before making any decisions on which steps to take on IHT planning.
We’re here to help
These changes are complex, but you don’t need to navigate them alone. If you’d like to understand how this affects your personal situation — or explore ways to adapt your plans — please get in touch with your Financial Planner.
Disclaimers:
This article is for information purposes only and does not constitute personal advice or a recommendation. If you are unsure about the suitability of any strategy mentioned, please speak to your adviser.
Tax treatment depends on individual circumstances and may change in future. The legislation referenced is currently in draft form and subject to parliamentary approval. While there is no indication of reversal, clients should be mindful that details may change before April 2027.
Investments that qualify for Business Relief (BR) carry additional risk and may not be suitable for all investors. You should seek advice before making any decisions involving BR-qualifying assets.
Past performance is not a reliable indicator of future results. The value of investments and income from them can go down as well as up, and you may not get back the amount originally invested.
Fidelius is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales. This communication is intended for UK residents only.
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