Your pension and inheritance tax from 6 April 2027
What is changing, what it could cost, and nine things worth considering before it happens.
George Taylor, CFAFounder and Lead Financial Planner, Blincoe Financial Planning
A guide for people approaching or in retirement whose estate is likely to face inheritance tax.
Figures correct as at 2nd October 2026. This guide is information, not advice.
Why I have written this
From 6 April 2027, most unused pension savings will form part of your estate for inheritance tax. It is one of the most significant changes to pension taxation in a generation, and it undoes a strategy that has served a lot of people very well for the past decade.
For years, pensions have sat outside the estate. That made them a useful estate planning tool. Plenty of people deliberately preserved the pension and spent other assets first, knowing the pension could pass to their family free of IHT. From April 2027 that approach no longer works.
The rules received Royal Assent on 18 March 2026, so this is now law rather than a proposal. The Government held firm throughout, despite sustained lobbying from the pension industry. That is worth noting, because on business and agricultural property relief the same Government made two significant concessions. On pensions it has made none of substance.
In this guide I set out what is changing and what is not, work through what it could cost using two examples, explain how the tax will actually be collected, and go through nine things I think are worth considering. There is a short appendix on the other tax changes landing on the same date.
This is written for someone approaching or already in retirement, with a defined contribution pension and an estate likely to exceed the available nil-rate bands. If you are married or in a civil partnership, the changes bite on second death rather than first.
Important note: A pension is a long-term investment and funds are not normally accessible until 55 (rising to 57 from April 2028). When investing via a pension, your capital is at risk. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
What is changing
At present, most unused pension funds sit outside your estate for IHT because pension schemes operate under discretionary trusts. From 6 April 2027 that exemption disappears. Your unused pension is added to the rest of your estate and, if the total exceeds your available nil-rate bands, the excess is taxed at 40%.
That is the whole of the change. A simple sounding change with substantial implications.
What is not changing
Three exemptions survive, and they matter:
Spouses and civil partners
Pension death benefits passing to a surviving spouse or civil partner remain exempt from IHT, as they are today,
Charities
Benefits paid to a registered charity are also exempt,
Death in service
Death-in-service benefits payable from registered pension schemes are excluded entirely.
The nil-rate bands are unchanged and remain frozen until April 2030. That is £325,000 each, plus a residence nil-rate band of £175,000 each where the home passes to direct descendants, (subject to the taper for estates over £2 million, which I cover below). For a couple, up to £1 million.
The existing income tax rules around age 75 are also unchanged. If you die before 75, your beneficiaries can draw on the inherited pension free of income tax. If you die at 75 or over, they pay income tax at their marginal rate on withdrawals.
It is the collision of those two things, the new IHT charge and the old age 75 rule, that produces what has been called the double death tax. I come back to it in section three.
The Government forecasts these measures will raise £1.5 billion a year by 2029/30, with the average inheritance tax bill rising by around £34,000. In certain cases the impact is considerably more severe than that average suggests, as the next section shows.
What it could cost
How much difference the change makes depends on where your estate sits.
| Where the estate sits | Effect of including the pension |
|---|---|
| Below the nil-rate bands | No change. The bands still cover everything |
| Between the bands and £2m | The pension is taxed at 40% above the bands |
| Pushed above £2m by the pension | 40% on the pension, plus loss of residence nil-rate band. An effective rate of up to 60% |
This is best explained by way of an example.
Jin and Sun are married with three children. Their estate consists of a main residence and other assets worth £1.1m, plus combined pension savings of £400k. They have combined nil-rate bands of £650k and combined residence nil-rate bands of £350k, so up to £1m can pass free of IHT.
In terms of their position on second death:
- Under current rules the pensions are excluded, so their taxable estate is £1.1m,
- After applying the £1m of nil-rate bands, £100k is liable to IHT at 40%, a charge of £40,000,
- From April 2027 the pensions are included, taking the estate to £1.5m,
- After the same £1m of nil-rate bands, £500k is liable at 40%, a charge of £200,000.
Their potential IHT liability increases by £160,000. Overnight, and without them doing anything at all.
The residence nil-rate band taper
For larger estates there is a second effect, and in my view it is the one that really bites. The residence nil-rate band tapers away once an estate exceeds £2 million, reduced by £1 for every £2 above that threshold. Adding a pension to the estate can push you over the line, so the pension is not only taxed itself, it also destroys relief on everything else.
James and Ana are both 80, with total assets of £2.5m. That is £2m of non-pension assets, including a main residence worth £750k, plus £500k of pension savings. They have left the pensions untouched, deliberately, to pass them to their three children free of IHT.
- Under current rules they face a potential IHT liability on second death of £400,000,
- Their three children stand to inherit a combined £2.1m, or £700k each,
- From April 2027 that liability rises to £700,000, an increase of £300,000,
- Each child receives £100k less than they would have done.
The effective rate of IHT on their £500k pension pot is not 40% in this example. It is 60%, because the pension pushes their estate above the £2m taper threshold and strips out their residence nil-rate band entitlement.
Important note: The Financial Conduct Authority does not regulate tax advice. Levels, bases and reliefs from taxation may be subject to change, and their value depends on the individual circumstances of the investor. These figures are illustrative and assume no growth between now and the date of death.
The double death tax
The most criticised aspect of the new rules is that the same money can be taxed twice.
First through inheritance tax on your estate. Then again through income tax when your beneficiaries draw on what is left, provided you died at 75 or over. Generally speaking, if you have already survived to minimum pension age, there is roughly an 80% probability that you will.1
Shortly after the new rules take effect, James and Ana pass away. Their £500k pension is split evenly between their three children, so each inherits c. £167k into a beneficiary's drawdown pension.
- All three children are high earners, paying income tax at 40% or 45%,
- Because James and Ana were both over 75 at death, withdrawals are taxed at those marginal rates,
- The pension is therefore hit with 40% IHT first, then income tax on the way out,
- At the higher rate, close to two thirds of the pension is lost to tax. At the additional rate it approaches 70%.
I should be clear that this is a simplified, worst-case illustration. In practice part of the pension may fall within available nil-rate bands, apportioned between pension and non-pension assets, which reduces the IHT charge. And beneficiaries usually have some flexibility to draw funds gradually across several tax years, using lower tax bands as they go. They also have the option to leave the pension invested to grow, as they do not have to take an income from it.
From a planning perspective this feels unduly punitive. A more balanced approach would have been either to bring pensions into IHT with no further income tax on withdrawal, or to leave them outside the estate and tax withdrawals as income regardless of age at death. Taxing the same pound twice is difficult to defend.
A note on complexity
A major national newspaper recently published an explanation of how the rules would work, including a claim that beneficiaries inheriting a pension could claim income tax relief against IHT already paid from that pension. It was wrong, a misreading of the legislation, and a correction followed. If tax journalists on a broadsheet are struggling with this, it tells you something about what ordinary families are being asked to navigate.
1 Based on ONS National life tables: UK (latest edition, released December 2025), comparing the number surviving at exact ages 55 and 75. Period life table figures; cohort projections suggest a slightly higher probability. ↩
How the tax will actually be paid
This is a little into the weeds, but it matters for a reason I come to at the end.
The original proposal was for pension scheme administrators to handle the IHT on pensions while personal representatives dealt with the rest of the estate. That would have been a logistical headache.
Instead, your personal representatives, normally the executors of your will, are now responsible for reporting and paying IHT on the whole estate including pension funds. A more practical outcome, though it does put the work on your executors. Broadly, the process runs as follows.
Information
Your executors identify your pension benefits and notify each scheme of the death. Each scheme must provide the value within four weeks, along with a split between exempt beneficiaries (spouse or charity) and non-exempt ones, usually following your expression of wishes.
Valuation and withholding
Your executors gather information across all schemes and the wider estate and determine whether IHT is payable. If it is, they can issue a withholding notice to each scheme, instructing it to hold back up to 50% of the benefits for up to 15 months after the end of the month of death, which gives them time to value the whole estate.
Report and pay
They calculate the IHT attributable to the pension, submit the account to HMRC, and notify the scheme and the beneficiaries of the amount due.
Settling the bill
There are three ways to pay the IHT due on pensions.
- Your executors or the beneficiaries can instruct the scheme to pay HMRC directly, where the bill is at least £1,000.
- Your executors can pay it from the rest of the estate and recover it from the pension beneficiaries.
- The pension can be paid out in full and the beneficiaries pay their share of the tax to your executors.
For someone with one pension this is an added layer of complexity. For someone with an old workplace scheme here, a SIPP there and a small preserved benefit somewhere else, it has the potential to become an administrative nightmare for whoever is left sorting it out.
Nine things worth considering
None of what follows is a recommendation. Which of these is right, if any, depends entirely on your circumstances. But these are the nine conversations I am having with clients.
Pensions are still worth building
I see some younger clients dismissing pension saving altogether, on the basis that the Government will tax it all anyway. That is understandable, and in my view wrong. Upfront income tax relief, tax-free investment growth and 25% tax-free cash on withdrawal still make pensions the best vehicle available for building long-term wealth. The lump sum allowance is currently £268,275. The trade-off is access, since funds are locked away until minimum pension age, but the tax advantages remain compelling.
But they should now be spent
The days of using a pension as an estate planning tool are numbered. Build a pension, spend a pension. In practical terms this means the pension moves up the withdrawal order, often ahead of ISAs and other liquid assets, with withdrawals kept within the basic-rate band (currently up to £50,270 of taxable income) where that is feasible.
We have talked before about £1.1m to £1.2m being something of a magic number for pension savings, roughly the maximum tax-free cash entitlement combined with scope to draw the balance over an average life expectancy at basic rate only. That thinking becomes more important from April 2027, not less.
Annuities become relatively more attractive
The reduced death benefits of a drawdown pension weaken one of the traditional arguments against annuity purchase. Why retain a large drawdown pot exposed to IHT and potentially income tax on withdrawal, when an annuity converts it into a guaranteed income for life?
This is reinforced by a significant improvement in annuity rates. A healthy 65-year-old could recently secure around 7.5% income on a level, single-life basis with a 10-year guarantee, roughly 50% higher than in 2021. A blended approach often works well: annuity income covering essential spending plus a margin of comfort, with drawdown retained for holidays, hobbies and the discretionary things.
Important note: Annuity rates change frequently and the figure above is a point-in-time illustration, not a quotation. An annuity is generally an irreversible decision and income typically cannot be stopped once it starts.
Do not act hastily
For most people my suggestion is to wait until the new rules actually come into effect. If you were to die between now and 6 April 2027, your pension still sits outside your estate for IHT. Making drastic changes now could mean giving up an advantage you currently have.
But do not wait for a new government either
I would be reticent about the school of thought that says wait for the next election, because a new government might reduce or abolish IHT. Historically, removing a major revenue earner has been politically difficult regardless of which party is in power. Plan for the rules as they are, not as you hope they might become.
Review who you have nominated
Death benefit nominations become considerably more important, particularly around the age 75 threshold that determines whether income tax is payable on an inherited pension.
Before 75
Beneficiaries inherit funds that are subject to IHT but free of income tax on withdrawal, so nominating adult children can work well,
At 75 or over
The funds face both charges, so it is worth asking whether the money should skip a generation.
A grandchild with no earned income has their full personal allowance of £12,570 each tax year, plus the basic-rate band above it. A higher-rate taxpayer child has neither. Where a pension is inherited by a minor, their parents or guardians can draw on the money for the child's benefit until they turn 18, at which point the child gets unrestricted access. For many clients we actively review beneficiary nominations on their 75th birthday.
One word of caution. Some older workplace schemes do not allow children to continue in membership, in which case a transfer to a more modern arrangement would be needed first. It may be worth checking your scheme rules.
Gifting from surplus income
This is the one I am most interested in. If you accelerate pension drawdown or purchase an annuity to create a regular income surplus, more income than you need to maintain your normal standard of living, those surplus amounts can potentially be given away under the Normal Expenditure out of Income exemption. Gifts made under this exemption are immediately outside your estate. There is no seven-year waiting period.
Three conditions have to be met. The gift must be regular in nature, it must come from income rather than capital, and it must not affect your standard of living.
The arithmetic can be attractive. Draw pension income as a basic-rate taxpayer and you pay 20% on the withdrawal. Gift it straight out and it sits immediately outside your estate, avoiding 40% IHT and a second round of income tax for your beneficiary. Better still, the gift could go into a child's or grandchild's pension, where it picks up income tax relief at their marginal rate at the other end.
The principal downside is record-keeping. HMRC may ask for evidence that the gifts were regular and made from income, so we typically suggest clients maintain a live IHT403 form recording income, expenditure and gifts each year.
Or use surplus income to fund life cover
Rather than gifting the surplus, you could use some or all of it to fund premiums on a whole-of-life policy written in trust. The policy pays a tax-free lump sum on death, available immediately to settle some or all of the IHT bill without waiting on pension schemes and HMRC.
In certain circumstances the maths stacks up very favourably, particularly where converting pension savings into an annuity also brings the estate back below the £2m residence nil-rate band taper threshold. There are real caveats. Health drives both the annuity rate and the premium, the longer you live the less favourable the arithmetic becomes, premiums must be maintained for cover to remain in place, and insurers require the cover to be justifiable against the actual liability.
- Whole-of-life cover can be expensive, particularly at older ages or with health conditions, and premiums paid may exceed the eventual payout.
- Plans typically have no cash-in value. Cover ceases if premiums stop, with no return of premiums paid.
- Some plans may increase in premium at the review period.
- Annuity rates could change in the future, and an annuity is generally an irreversible decision.
- A level annuity will lose buying power to inflation and, without a guarantee or death benefit, may pay out little if you die early.
- Annuity and drawdown income is taxable.
- Premiums are only immediately outside your estate if they meet the Normal Expenditure out of Income conditions, and the policy must be correctly written in trust.
- Any figures are subject to underwriting.
Consolidate, and die tidily
Following on from section four, your executors will need to contact and then liaise with every scheme you hold, instruct each to hold funds back, arrange payment and coordinate the release of funds to beneficiaries. Consolidating multiple pensions into a single arrangement now, where appropriate, will make life considerably easier for whoever handles your estate.
The word “appropriate” is doing some work in that sentence. Older schemes occasionally carry guarantees, protected tax-free cash or enhanced benefits that are worth more than the administrative convenience of consolidating. Each one needs checking before it is moved.
Where to start
The most common thing I see in estate planning is not a lack of interest. It is inertia. Most people care a great deal about what happens to their wealth, and are still reluctant to act.
That hesitation is rational. You have spent decades accumulating this. Being asked to give large sums away, or lock them into less liquid structures, understandably triggers anxiety about what happens if care costs spike or circumstances change.
Cashflow modelling is how we answer the one fear that can actually be answered, which is the fear of running out. We build a full picture of assets, income and spending, including the discretionary spending most people underestimate, then add a buffer of 25% to 30% on top. We factor in whatever care reserve you want to hold. Then we project forward on deliberately cautious assumptions, typically 4% to 5% annual returns and 3.5% inflation, to age 100.
If the plan holds up under those assumptions, we can quantify the surplus. Once you know the surplus, you can see how much estate planning is possible without putting your own position at risk. Most clients do not action the full amount. It is still useful to know the number.
Six questions worth answering first
If you cannot answer the fourth one, you are in good company. It is worth checking before anything else.
The other changes on 6 April 2027
Pensions are the headline, but four further measures take effect on the same date. None of them is as significant on its own, and together they are worth a look.
| What changes | Detail | Who it affects |
|---|---|---|
| Property income tax | Rates rise by 2 percentage points across all bands, to 22%, 42% and 47% | Landlords and anyone with rental income |
| Savings income tax | Rates rise by 2 percentage points across all bands, to 22%, 42% and 47% | Anyone with interest above the personal savings allowance |
| Cash ISA allowance | The cash ISA limit for under-65s falls from £20,000 to £12,000, with the remaining £8,000 needing to go into a stocks and shares ISA | Under-65s using the full allowance in cash |
| Making Tax Digital | The qualifying income threshold drops to £30,000, bringing more people into quarterly digital reporting | Sole traders and landlords |
Two further measures are worth having on the radar although they land later. From April 2028 a high value council tax surcharge applies to properties above £2m, starting at £2,500 a year and rising in increments to £7,500 above £5m. From April 2029 the National Insurance exemption on salary sacrifice pension contributions is limited to the first £2,000 a year.
Important note: The Financial Conduct Authority does not regulate tax advice. Tax treatment depends on individual circumstances and may change.
George Taylor
George started Blincoe because he wanted to give clients a fairer and better service than he had seen larger firms offer. He leads the planning team and writes the weekly Blincoe blog, which has followed the 2027 pension changes since they were first announced in the 2024 Autumn Statement. This guide pulls that thinking into one place.
Important information
This guide is for general information only and is intended for retail clients. It does not constitute financial or tax advice, nor is it an offer to buy or sell any specific investment and should not be treated as such or used to take any course of action without obtaining personalised financial advice. Since we do not know your personal financial situation, you should not rely on this content as tailored advice. While we aim to provide accurate and up-to-date information, we cannot guarantee that all details remain correct over time. The information is correct at the date of publication. We are not responsible for any losses resulting from actions taken based on this content.
Investment risk
The value of investments and any income from them can fall and you may get back less than you invested. A pension is a long-term investment and funds are not normally accessible until 55, rising to 57 from April 2028. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
Tax and estate planning
The Financial Conduct Authority does not regulate tax advice, trust advice or estate planning. Levels, bases and reliefs from taxation may be subject to change, and their value depends on the individual circumstances of the investor. All figures and thresholds quoted are those applying at the date of publication.
Regulatory information
Blincoe Financial Planning Limited is an appointed representative of Sense Network Ltd, which is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales, No. 14569306. Registered office: Star Lodge, Montpellier Drive, Cheltenham GL50 1TY. Blincoe Financial Planning Ltd is entered on the Financial Services Register under reference 1000321.