Pensions Are Joining the Inheritance Tax Net in 2027 — What It Means for Your Family

If you did your estate planning any time in the last twenty years, you were almost certainly told the same thing: your pension sits outside your estate, so it escapes inheritance tax (IHT). For a generation, the pension was the cleverest, simplest way to pass wealth down tax-free.

From 6 April 2027, that changes. Most unused pension funds will be counted as part of your estate for inheritance tax — and a great many plans that were carefully built around the old rules are about to stop working the way their owners assume.

What’s actually changing

In broad terms, the value of unused defined-contribution pension pots — and certain lump-sum death benefits — will be brought into your estate when calculating inheritance tax from April 2027. The pension stops being a tax-free wrapper for passing money on after death and starts being treated much more like the rest of your wealth.

The headline thresholds that frame IHT haven’t moved to compensate: the standard nil-rate band remains £325,000, and the residence nil-rate band can add up to £175,000 where you leave a home to direct descendants. Anything above your available bands is generally taxed at 40%.

Who this hits — and who it doesn’t

You are most likely to feel this if:

• You have a meaningful defined-contribution pension you don’t expect to fully spend.
• Your total estate — home, savings, investments and now pensions — is heading above your nil-rate bands.
• You intended to leave your pension to children or grandchildren rather than a spouse.

You are less exposed if your estate sits comfortably under the thresholds, or if you’re leaving everything to a spouse or civil partner, where the usual exemption still applies. The trap is the family who were under the threshold on paper — until their pension was added in.

How big could the bill be?

A simple illustration shows the scale. Imagine an estate of a £400,000 home and £150,000 of savings — comfortably covered by the combined nil-rate bands, with no IHT to pay under the old approach. Now add a £300,000 unused pension that, from 2027, counts towards the estate. Suddenly a slice of the estate is exposed to 40% tax that simply wasn’t there before. For some families that’s a five-figure bill arriving out of nowhere.

The change doesn’t create new wealth to tax — it re-labels wealth people already had as “sorted”. That’s why it catches so many off guard.

The double-tax trap to watch

There’s a sharper edge for those who die from age 75 onwards. In that situation, inherited pension income can be taxable in the beneficiary’s hands as well as the pension being counted for inheritance tax on the estate. Layered together, the effective tax rate on some inherited pension money can climb alarmingly. This interaction is one of the strongest reasons to get a proper review rather than rely on old assumptions.

Sensible moves to consider now

There’s no single right answer — it depends entirely on your circumstances — but these are the levers a planner will look at:

• Review your beneficiary nominations. Out-of-date nominations are common and can undo the rest of your plan.
• Use gifting allowances. The annual exemption and gifts out of surplus income remain powerful, especially started early.
• Consider the order you spend. The old logic of “spend everything except the pension” may now be backwards for some.
• Look at trusts and life cover written into trust to provide for an expected IHT bill without adding to the estate.
• Make sure your will is current so reliefs like the residence nil-rate band actually apply.

Every one of these can backfire if done in isolation. They work when they’re co-ordinated.

Why this is the year to review your plan

The 2027 change is the biggest shift in everyday inheritance tax planning in years, and it rewards people who act before the deadline rather than after. If your estate plan was built around the idea that your pension is untouchable by IHT, it’s now worth a fresh look — ideally with someone who can see your will, your pensions and your wider estate as a single picture.

A good first step is simply to compare regulated estate planners who handle inheritance tax, see what a review would cost, and choose someone you trust. It’s usually far less than the tax a tidy plan can save.