Inheritance Tax and pensions from 2027: what’s changing and what could it mean for you?
From April 2027, significant changes to the way pensions are treated for Inheritance Tax could affect how much wealth some families are able to pass on.
For many years, pensions have often sat outside a person’s estate when calculating Inheritance Tax. From 6 April 2027, most unused pension funds and certain pension death benefits are expected to be included.
That means a pension that has been built up for retirement, or deliberately preserved to pass on to the next generation, could potentially increase the value of an estate for Inheritance Tax purposes.
Suggested read time: 5 minutes
Why are the Inheritance Tax rules changing?
Inheritance Tax, or IHT, may be payable when the total value of your estate exceeds the available allowances.
For the 2026/27 tax year, the standard nil-rate band is £325,000. There is also a residence nil-rate band of £175,000 where qualifying conditions are met, including leaving a main residence to direct descendants.
This means an individual may potentially be able to pass on up to £500,000 before IHT becomes payable. For married couples and civil partners, unused allowances can potentially be transferred, meaning qualifying estates could pass on up to £1 million.
However, these allowances are frozen until April 2031. As property, pension and investment values change over time, more estates could therefore find themselves approaching the thresholds.
At the moment, pensions are generally excluded when calculating the value of an estate for IHT. That is the part that is changing.
What happens to pensions from 6 April 2027?
From 6 April 2027, most defined contribution pensions and certain pension death benefits are expected to form part of the estate when calculating Inheritance Tax.
This could include:
unused defined contribution pension funds
lump-sum death benefits from unused or drawdown pension funds
beneficiary drawdown pensions
beneficiary pension annuities
certain payments made during a guaranteed period from a pension annuity.
There are exceptions. For example, defined benefit pensions are generally treated differently because there isn't normally an unused pension fund available to pass to beneficiaries. Certain dependants' pensions, annuities and death-in-service benefits may also fall outside the new rules.
If you are unsure how your own pension arrangements could be affected, this is an area worth reviewing before the new rules come into effect.
Could the change make a significant difference?
Potentially.
Imagine an estate worth £800,000, consisting of:
£250,000 in a main residence
£350,000 in investments, savings and other assets
£200,000 held within a pension.
If the main residence is being left to a child and the individual qualifies for both the nil-rate band and residence nil-rate band, up to £500,000 could potentially be passed on before IHT applies.
Under the current rules, the £200,000 pension would generally sit outside the estate. That would leave £600,000 being assessed, with £100,000 potentially subject to IHT. At a 40% rate, that could mean an IHT bill of £40,000.
From 6 April 2027, if the pension is included, the estate assessed for IHT could rise to £800,000. On the same simplified assumptions, £300,000 could then be exposed to IHT, creating a potential bill of £120,000.
This is only an illustrative example. The actual position will depend on individual circumstances, exemptions, beneficiaries and the rules in force at the time.
Does this mean you should start withdrawing your pension?
Not necessarily.
Changing your retirement strategy purely because of Inheritance Tax could create other consequences.
Pension withdrawals can be subject to Income Tax, for example. Taking significantly more from a pension could push some people into a higher Income Tax band or reduce the amount of money available to support them later in retirement.
The important question is therefore not simply:
“How do I reduce Inheritance Tax?”
It is:
“How does this change fit into my overall retirement and estate plan?”
That could mean looking at the income you need, the assets you hold, who you would like to benefit from your estate and how financially secure you would remain under different scenarios.
Could gifting become more important?
For some families, lifetime gifting may form part of the conversation.
There are several gifting allowances available under current rules. These include the £3,000 annual exemption, certain small gifts and allowances for gifts made on marriage or civil partnership.
Regular gifts made from surplus income may also fall outside the estate where the relevant conditions are met. These gifts need to form part of normal expenditure, be made regularly and not affect the giver's normal standard of living. Keeping clear records can be important.
Other gifts can remain within the estate for Inheritance Tax purposes for a period after they are made, so gifting shouldn't be viewed as a simple or universal solution.
You also need to consider your own future needs before giving money away. Once money has been gifted, you may not be able to get it back if your circumstances change.
What about leaving a pension to a spouse or civil partner?
Assets passed between spouses or civil partners are normally exempt from Inheritance Tax.
This means the new rules will not necessarily create an immediate IHT liability where a pension is passed to a surviving spouse or civil partner.
However, it could affect the value of the surviving partner's estate later, so it is still worth considering the wider family plan.
Pension death benefits are also not usually governed by your will. Pension providers commonly ask members to complete an expression of wish or nomination form explaining who they would like to receive their pension benefits.
Reviewing these nominations regularly can help ensure they continue to reflect your intentions.
Your executor may have more work to do
The changes could also affect the administration of an estate.
Your personal representative or executor will need to identify relevant pensions and obtain their value at the date of death so they can establish whether IHT is payable.
This makes keeping clear records of pension arrangements increasingly important.
The scale of the issue shouldn't be underestimated. The guide notes that the Pensions Policy Institute estimated in 2024 that there were 3.3 million lost pension pots worth £31.1 billion.
Keeping details of your pensions together, alongside your wider financial records, could make things considerably easier for your family and advisers.
Four areas you may want to review before 2027
Rather than making isolated changes, the forthcoming rules are a good reason to look at your financial arrangements as a whole.
You might want to consider:
Your retirement income strategy
Are you drawing money from your pension and other assets in the most appropriate order for your circumstances?
Your beneficiaries and pension nominations
Do your current expression-of-wish forms still reflect who you want to benefit?
Lifetime gifting
Could gifting form part of your estate planning without compromising your own financial security?
Your wider estate plan
Are your will, pensions, investments and other arrangements working together?
There may also be circumstances where annuities, trusts, charitable legacies or life insurance form part of the wider discussion, although their suitability will depend heavily on individual circumstances. The original guide explores these options in more detail.
Don't wait until April 2027 to think about it
April 2027 might still feel some way off, but estate and retirement planning works best when there is time to consider your options rather than react to a deadline.
For some people, the changes will make little difference. For others, bringing unused pension wealth into their estate could materially change their potential Inheritance Tax position.
A review can help you understand what the new rules could mean for your pension, your retirement income and the wealth you hope to leave behind.
Talk to Folan Brookes
If you'd like to understand how the pension and Inheritance Tax changes could affect your financial plans, speak to the Folan Brookes team.
We can review your pensions and wider financial arrangements and help you consider them in the context of your longer-term retirement and estate-planning objectives.
Call: 01865 339640 Email: info@folanbrookes.co.uk
Important information
All information is correct at the time of writing and is subject to change in the future.
HM Revenue and Customs' practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
The Financial Conduct Authority does not regulate Inheritance Tax planning, estate planning, cashflow modelling, will writing, trusts or Lasting Powers of Attorney.
Will writing is a referral service.
Folan Brookes Financial Consultants Limited is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited, which is authorised and regulated by the Financial Conduct Authority.
Approved by The Openwork Partnership on 08/10/2026
Sources
HM Revenue & Customs, “Inheritance Tax on pensions: technical note”, published 11 May 2026 and updated 29 May 2026. Confirms that from 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of an estate for Inheritance Tax purposes. GOV.UK
HM Revenue & Customs, “Inheritance Tax on unused pension funds and death benefits”. Government impact assessment estimating that around 10,500 estates could become liable for IHT in 2027/28 that would not previously have been liable, while around 38,500 could pay more. The average increase for affected estates is estimated at around £34,000. GOV.UK
HMRC: Inheritance Tax on unused pension funds and death benefits
Office for Budget Responsibility, “Inheritance tax”, updated 9 February 2026. Provides the OBR's latest IHT receipts forecasts and information on the nil-rate and residence nil-rate bands. Office for Budget Responsibility
Pensions Policy Institute, “Lost Pensions 2024”, Briefing Note 138, published 24 October 2024. Estimates there are around 3.3 million lost pension pots containing £31.1 billion of pension assets. Pensions Policy Institute
Folan Brookes, “Your Guide to the New Inheritance Tax and Pension Rules from 2027”, approved by The Openwork Partnership on 31 July 2026. This is the source document used to develop this article.
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