Written by Tim Lynch, Private Client Partner

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The big shift

For decades, your pension has been one of the most powerful tools for passing wealth to the next generation, sitting outside your estate and free from inheritance tax. That changes on 6 April 2027.

From that date, most unused pension funds and death benefits will be included in your estate for inheritance tax purposes. At 40%, that is a significant hit on wealth that many people assumed would pass to their families intact.

This is not a distant problem. It is happening in less than a year. And the time to plan is now.

In conversations with clients over the last few months, I have seen the same pattern repeatedly. People who were told for years to preserve their pension, and who built their wider retirement plan around that advice, are quietly realising the endgame has changed. Most have not yet worked out what to do next, and the year before the new rules take effect is the window that matters most.

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What is changing

Your unused pension pot will be added to the value of your estate when you die. If your total estate exceeds the nil-rate band, inheritance tax at 40% applies, including on your pension.

For defined contribution pensions, the residual value, any funds not yet drawn down, will form part of your estate. For defined benefit schemes, the pension protection lump sum death benefit will be included.

There are some exemptions worth knowing:

• Pension funds passed to a surviving spouse or civil partner remain exempt
• Registered charities are also exempt
• Death in service benefits are not affected
• Dependants' scheme pensions are excluded

But for most people passing wealth to children or grandchildren, the picture has changed considerably.

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What is not changing

It is important to understand what stays the same, because not everything is affected.

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The income tax rules on pensions remain unchanged:

• When you first access your defined contribution pension, you can still take 25% as a tax-free lump sum up to the available lump sum and death benefit allowance (LSDBA), which in most cases is £1,073,100
• All other withdrawals are subject to income tax at your marginal rate
• If you hold a defined contribution pension and die before your 75th birthday, your beneficiaries may still be able to draw on the remaining pension fund free of income tax
• If you die aged 75 or older, your beneficiaries will pay income tax at their marginal rate on any funds they draw down, though if you have not fully crystallised your pension, they may still be able to take a 25% tax-free lump sum to the extent your LSDBA has not been fully used
• For defined benefit schemes, dependants' pensions are subject to income tax regardless of when the member dies, though part of any lump sum may be paid tax-free

The standard inheritance tax exemptions for lifetime gifts also remain unchanged, more on those below.

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Who does this affect?

You should be thinking about this now if you:

• Hold a significant defined contribution pension pot
• Have historically kept your pension untouched to pass on to your family
• Hold business or agricultural assets within a SIPP or SASS
• Are approaching or over 75
• Have an estate that is already close to or above the inheritance tax threshold
• Are a trustee holding qualifying business or pension assets

Treasury estimates suggest around 10,500 additional estates will fall into inheritance tax as a result of these changes, with those already paying IHT facing average additional bills of around £34,000. That is before income tax is factored in.

For context, a family member inheriting your pension pot after 6 April 2027 could face 40% inheritance tax and up to 45% income tax on the balance. In a worst-case scenario, they could receive as little as 33p in every pound.

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The admin burden - don't underestimate it

One of the less-discussed consequences of these changes is the administrative challenge they create. Executors, not pension providers will be responsible for reporting and paying the inheritance tax on pension funds. That means tracking down pension pots, liaising with providers, and managing tax liabilities on assets they may not directly control.

Pension scheme administrators will have new duties to support executors, including sharing information within four weeks of being notified of a death. Executors will also have the option to instruct scheme administrators to withhold up to 50% of taxable benefits, and to pay inheritance tax directly to HMRC on their behalf.

If you have not updated your pension nomination forms recently, now is the time. Outdated or missing nominations will make an already complex process significantly harder for your loved ones.

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How to plan - your options

^{1. Review your succession and wealth strategy}

If your pension was central to your wealth transfer strategy, that plan needs revisiting urgently. The assumptions it was built on no longer hold.

Historically, many individuals with both pension and non-pension assets chose to fund retirement spending from other sources, leaving the pension untouched because it sat outside their estate. That planning advantage has now gone.

If you still hold both non-pension assets and pension funds, there may be scope to make lifetime transfers now to reduce the likely inheritance tax on your estate. If you have already given away most of your non-pension assets, your options are more limited, but a review is still worthwhile.

^{2. Consider lifetime gifts from non-pension assets}

Making gifts from non-pension assets now while the rules allow it, can reduce your estate and your IHT liability.

Gifts are a potentially exempt transfer (PET) and free from inheritance tax if you survive seven years. If you die within seven years, the gift is brought back into your estate, though a lower, tapered rate of inheritance tax may apply if you survived at least three years. Your nil-rate band will be applied first against any lifetime gifts, meaning the inheritance tax cost is effectively passed to the death estate.

^{3. Take your tax-free cash}

If you have not yet crystallised your pension, you may want to consider taking your 25% tax-free lump sum. A gift of those funds could qualify as a potentially exempt transfer, free from inheritance tax if you survive seven years, with reduced rates after three.

^{4. Consider drawing down your pension}

Withdrawing your pension over a period of time and making gifts to family members can still be effective planning. You will pay income tax on the withdrawals, but if you survive seven years there may be no inheritance tax, meaning your beneficiaries receive at least 55p in the pound rather than as little as 33p.

^{5. Gifts out of income}

If you have surplus income each year after meeting your normal living costs, making regular gifts from that surplus can be free from inheritance tax immediately and without any survivorship requirement.

However, this needs to be structured carefully. HMRC will require your executors to demonstrate that you had genuine surplus income and that the gifts were made on a regular basis. It is also worth noting that regular pension withdrawals made specifically to fund gifts may not qualify as surplus income in HMRC's view, particularly a tax-free lump sum, which is unlikely to be treated as income at all. An annuity, on the other hand, is more likely to qualify.

^{6. If you hold business or agricultural assets in a pension}

Business relief and agricultural relief will not apply to assets held within a pension from April 2027. Previously, such assets were effectively IHT-neutral, relief applied while held personally, and the pension exemption applied once transferred. That is no longer the case.

If this applies to you, explore whether extracting those assets from your pension makes sense. This requires careful professional advice, particularly around ownership structure, valuation, and the potential stamp duty land tax and income tax charges involved. Often the simplest option is for the business or trading entity to buy the assets back at market value, but professional guidance is essential.

^{7. Plan around age 75}

If you are approaching 75, the rules become more complex still. After your 75th birthday, your pension beneficiaries become subject to income tax on any drawdowns, in addition to the new inheritance tax charge. A review of your plans ahead of this milestone could make a material difference to what your family ultimately receives.

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A note on investment advice and pension scams

This article focuses on the tax position only and should not be taken as investment advice. Accessing your pension benefits involves important investment decisions alongside the tax considerations covered here, always consult a suitably qualified independent financial adviser before taking action.

It is also worth noting that significant tax changes like these attract pension scams. If something sounds too good to be true, it almost certainly is. Always take advice from a regulated, reputable adviser.

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The bottom line

These changes will affect more people than the government's headline figures suggest. If you have built up meaningful pension wealth, the strategy that made sense yesterday may cost your family dearly tomorrow.

The good news is there is still time to act. But not much of it.

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A closing thought

If you have built up meaningful pension wealth and have not yet revisited your estate plan in light of the April 2027 change, the most useful thing you can do in the next few months is sit down and look at it properly.

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DISCLAIMER This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.

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