Pensions and Inheritance Tax from April 2027: What's Changing and Nine Ways to Respond

(image created by AI; article written by me)

By George Taylor, CFA

Published: 08/10/2026

Six Months to Go…

From 6 April 2027, most unused pension savings will form part of your estate for inheritance tax (IHT) purposes. 

This is a major change. The Government forecasts it will raise around £1.5bn a year by 2029/30, with the average IHT bill increasing by around £34,000.

With just over six months to go, we’ve pulled our thinking together into a single guide: Your pension and inheritance tax from 6 April 2027, available online or as a PDF.

And in this week’s blog, I summarise the main changes and illustrate how the new rules could have a significant impact on your potential IHT bill. I also look at the rather punitive ‘double death tax’ that can arise in some circumstances, before exploring nine ways the new rules could change how we think about pensions, retirement income planning and estate planning.

Please 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.

What is changing

At present, most unused pension savings sit outside your estate for inheritance tax (IHT) purposes.

This has made pensions a particularly useful estate planning tool. Many people have deliberately spent other assets first, knowing that their pension could potentially be passed down to their family free of IHT. From 6 April 2027, that changes. 

Most unused pension savings will be included in your estate when calculating IHT. Where the value of your taxable estate exceeds your available nil-rate bands and exemptions, the excess is generally taxed at 40%.

Note here, pensions left to a spouse, civil partner or charity will remain exempt.

There is an additional sting. The income tax rules for inherited pensions are not changing. Die before age 75 and your beneficiaries can generally draw the inherited pension free of income tax. Die aged 75 or over and withdrawals are generally taxed at the beneficiary’s marginal rate of income tax.

It is the collision of these two tax regimes – IHT on the pension first, followed potentially by income tax when your beneficiaries withdraw it – that can lead to extremely punitive effective tax rates (more on this shortly). 

What it could cost

The potential impact of the new rules is best explained with a couple of examples.

Example 1 – a £160,000 increase in IHT

Jack and Kate are married with three children. They own their main residence and other assets worth £1.1m, alongside combined pensions of £400,000.

Looking at their position on second death:

• Under the current rules, their pensions sit outside the estate, leaving £1.1m potentially subject to IHT.

• Assuming they have the full £1m of combined nil-rate bands available, £100,000 is taxable at 40%, resulting in an IHT bill of £40,000.

• However, from April 2027, their £400,000 of pensions are also brought into the estate, increasing its value to £1.5m.

• After the same £1m of nil-rate bands, £500,000 is now taxable at 40%, resulting in an IHT bill of £200,000.

Their potential IHT bill therefore increases fivefold, from £40,000 to £200,000 – an additional £160,000 overnight, despite no change in the value of their assets or their personal circumstances.

For larger estates, however, there can be a second and potentially more damaging effect.

The residence nil-rate band is tapered by £1 for every £2 that an estate exceeds £2m. Bringing pensions into the estate can therefore do more than simply make the pension itself liable to IHT – it can also reduce the IHT relief available against the rest of the estate.

Example 2 – an effective 60% IHT charge on the pension

James and Juliet are both 80. They have £2m of non-pension assets, including their £750,000 home, alongside £500,000 in pensions which they have deliberately left untouched to pass on to their three children.

Under the current rules, their potential IHT bill on second death is £400,000 (£2m estate, less £1m of available nil-rate bands, with the remaining £1m taxed at 40%).

From April 2027, including their pensions increases the estate to £2.5m and their potential IHT bill to £700,000.

That is an additional £300,000 in IHT – equivalent to a staggering 60% of their £500,000 pension.

Why such a significant increase? Because bringing the pension into the estate has a double impact:

• The pension becomes subject to IHT; and

• Their residence nil-rate band entitlement is reduced, as this relief is progressively tapered away once the estate exceeds £2m.

And, as we’ll see next, IHT may only be the beginning of the tax bill.

The Financial Conduct Authority does not regulate Trusts, Estate and Tax Planning. Levels, bases of 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

Perhaps the most criticised aspect of the new rules is that the same pension can effectively be taxed twice:

1. First through inheritance tax; and

2. Then through income tax when beneficiaries withdraw what is left, where the previous pension holder died aged 75 or over.

Consider a simple example.

Suppose £100,000 of pension savings is subject to 40% IHT. This leaves £60,000 for the beneficiaries.

If they are higher-rate taxpayers and withdraw the remaining funds at 40% income tax, they pay a further £24,000 in tax.

The result is that just £36,000 of the original £100,000 reaches the beneficiaries – an effective combined tax charge of 64%.

For additional-rate taxpayers paying 45% income tax, the amount received falls to £33,000, representing a combined tax charge of 67%.

These are simplified illustrations. In practice, the outcome will depend on the available IHT allowances and exemptions, how the IHT liability is apportioned, and the beneficiaries' circumstances, including when and how they withdraw the inherited pension.

But the key point is that from April 2027, pensions could face IHT on death and further income tax when beneficiaries withdraw the remaining funds.

That fundamentally changes the attraction of preserving pension savings for the next generation.

Nine things worth considering

None of the following is a personal recommendation. Which strategies, if any, are appropriate will depend on your circumstances.

But these are the conversations I’m increasingly having with clients, and our guide explores each in more detail.

i. Pensions are still great

Pensions are still very attractive.

Upfront tax relief, tax-free investment growth and the ability to take up to 25% tax-free cash (normally subject to the £268,275 lump sum allowance) mean pensions remain one of the most tax-efficient ways to build wealth for retirement.

The new rules don't change that.

ii. But they should now be spent

What does change is the logic of leaving pensions untouched purely for inheritance tax purposes.

For many people, “build a pension, spend a pension” may become a more appropriate approach.

Pensions are now likely to move up the withdrawal order, potentially ahead of ISAs and other investments. Where possible, withdrawals might be managed within the basic-rate income tax band (up to £50,270 of total taxable income in England, Wales and Northern Ireland).

iii. Annuities become relatively more attractive

Annuities are worth reconsidering.

A healthy 65-year-old can currently (as at 08/10/2026) secure an annuity rate of around 8% (level income, single life, with a 10-year guarantee) – approximately 60% higher than in 2021.

In our view, there is considerable merit in using a combination of guaranteed income – from annuities, other private pensions and the State Pension – to cover essential expenditure, while retaining flexible drawdown for everything else.

The main drawback is that buying an annuity is generally an irreversible decision, and a level annuity will lose purchasing power to inflation.

Annuity rates change frequently. The figure above is a point-in-time illustration, not a personal quotation.

iv. Do not act hastily

There is an important timing consideration.

Until 6 April 2027, most unused pension savings remain outside your estate for IHT purposes.

Taking large withdrawals now, simply to get money out of your pension, could inadvertently make your estate's IHT position worse if you die before the new rules take effect.

Put simply, acting too early could be costly.

Of course, this consideration becomes less significant as we approach April 2027.

v. But do not wait for a new government either

This week, there has been renewed discussion in the press about potential changes to inheritance tax under a future Conservative government, including proposals to exempt the main residence and provide additional IHT allowances.

Such proposals may sound attractive, but there are several uncertainties.

A future government would first need to take office, introduce the proposed reforms and implement them. Even then, the changes might make little difference to some estates, depending on their size and composition.

In our view, we should plan for the rules as they stand, not the rules you hope might exist in future.

If the legislation changes, the plan can change with it.

vi. Review your Expression of Wishes

Your pension Expression of Wishes tells the scheme trustees or administrators who you would like to receive your pension benefits when you die. It is separate from your will, and it's worth checking that it still reflects your intentions.

Under the new rules, who inherits your pension could become even more important.

For example, where you die aged 75 or over, leaving pension benefits to a younger generation may be worth considering.

A young grandchild with little or no other taxable income could potentially withdraw inherited pension benefits using their personal allowance (0% tax) and basic-rate tax band (20%), rather than paying the 40% or 45% income tax that might apply to an adult child.

Where the beneficiary is a minor, an appropriate adult may be able to arrange withdrawals on their behalf, with the funds used for the child's benefit, subject to the scheme's rules.

Of course, tax isn't the only consideration. Family circumstances, control over the funds and the needs of different beneficiaries all matter.

An Expression of Wishes can generally be updated at any time. It may therefore make sense to review your nominations as you approach age 75, and again afterwards, particularly if the income tax position of your intended beneficiaries differs significantly.

vii. Consider gifting from surplus income

This is one of the planning opportunities attracting the most interest.

Regular gifts made from surplus income, which do not affect your normal standard of living, can potentially qualify for the normal expenditure out of income exemption. Where the conditions are met, these gifts are immediately exempt from IHT – there is no seven-year wait.

Consider a married couple who each receive £30,000 a year in guaranteed pension income. Together, this provides approximately £4,400 a month after income tax, broadly matching their normal expenditure.

They also have combined pension savings of £500,000.

They could consider drawing an additional £20,000 gross each from their pensions, taking their individual taxable incomes to £50,000 – just within the basic-rate band.

After 20% income tax, the additional withdrawals would provide £32,000 a year.

If this money is genuinely surplus to their needs and is gifted regularly as part of their normal expenditure, it could potentially qualify for immediate IHT exemption.

The attraction is that they pay basic-rate income tax of 20% on the pension withdrawals now, but could avoid 40% IHT on those funds later – as well as a second round of income tax when their beneficiaries inherit and withdraw the remaining pension.

In other words, they could be exchanging a known 20% income tax charge today for much lower taxes on death.

The important distinction is that the exemption applies to qualifying gifts from income, not simply to money withdrawn from a pension and given away. Careful planning, evidence of regularity and good record-keeping are essential.

viii. Or use surplus income to fund life cover

Another option is to use surplus income to fund a whole-of-life insurance policy written in trust.

Rather than gifting the surplus income directly to children or grandchildren, the couple in our previous example could use some of it to pay life assurance premiums.

The policy could then provide a lump sum on death to help beneficiaries meet the eventual IHT bill, without needing to sell investments or other assets.

The numbers can work favourably, particularly where premiums are funded from income that would otherwise accumulate within the estate.

However, the cost of cover depends on factors such as age, health and the level of insurance required. Premiums must also remain affordable over the long term.

Life assurance plans typically have no cash-in value. If premiums stop, cover may lapse. Some whole-of-life plans are subject to premium reviews, and any quotation will be subject to underwriting.

ix. Consolidate, and die tidily

There is also a strong administrative argument for reviewing how many pension arrangements you hold. Die tidily.

From April 2027, executors and pension scheme administrators will face additional responsibilities in establishing pension values and dealing with IHT.

Having numerous pension arrangements scattered across different providers could make an already difficult process more complicated for your family.

Moreover, some older arrangements offer limited beneficiary options. For example, they may not permit inherited pensions to remain invested in beneficiary drawdown, or may restrict the ability to nominate younger beneficiaries.

Where a lump-sum death benefit is the only option, beneficiaries could face a substantial income tax charge in a single tax year – potentially making the double-tax problem even worse.

Consolidating pensions into a modern, flexible arrangement, alongside keeping Expressions of Wishes up to date, could therefore be worthwhile.

However, consolidation is not always appropriate. Existing guarantees, protected tax-free cash, charges, investment options and other valuable benefits must be considered before transferring.

Conclusion

From April 2027, pensions stop being an estate planning tool and, for some, become the most heavily taxed asset they own. The response is not to stop saving into a pension but to rethink how it is spent and who inherits it.

The full guide, including an appendix on the other tax changes landing on 6 April 2027, is available here.

As always, if you would like help working out what this means for you, please get in touch for a chat.

Happy Thursday.

Kind regards,
George

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