For many years, pensions have been one of the most effective ways to pass wealth to the next generation. Unlike property, savings and investments, pension funds have generally sat outside your estate for Inheritance Tax (IHT) purposes. That meant your beneficiaries could inherit your pension without it being included in the 40% IHT calculation.
From April 2027, that position is set to change.
The government has confirmed that most unused pension funds and death benefits will be brought into the scope of Inheritance Tax. For individuals and families who have relied on pensions as part of their estate planning strategy, this is a major shift and one that may require a complete rethink of how retirement assets are used.
Why pensions have been so valuable for estate planning?
Under the current rules, pension wealth has enjoyed significant tax advantages on death.
If you die before age 75, your defined contribution pension can usually be passed to your beneficiaries free from both Income Tax and Inheritance Tax, provided benefits are paid within the relevant time limits.
If you die after age 75, beneficiaries may pay Income Tax on withdrawals at their own marginal rate, but the pension itself still sits outside your estate for IHT purposes.
This has made pensions particularly attractive for intergenerational planning. Many retirees have intentionally drawn income from ISAs, savings and other investments first, while preserving pension funds to pass on as tax-efficiently as possible.
For some families, pensions have effectively become a legacy planning vehicle rather than simply a retirement income source.
What will change from April 2027?
From April 2027, most unused pension funds are expected to be included within the value of your estate for Inheritance Tax purposes.
In practical terms, this means the value of your pension could now contribute towards the IHT threshold. If your estate exceeds the available allowances, some or all of your pension may become subject to Inheritance Tax at 40%.
Current thresholds remain:
- £325,000 nil-rate band
- Up to an additional £175,000 residence nil-rate band in certain circumstances
Potentially allowing up to £500,000 per individual, or £1 million for married couples and civil partners where allowances are fully transferable.
However, many people with substantial pension savings could now find themselves exposed to a larger IHT liability than anticipated.
For example, a pension fund worth £300,000 that previously sat entirely outside the estate could potentially create an additional £120,000 Inheritance Tax charge.
Depending on how death benefits are eventually taxed, beneficiaries may also still face Income Tax on withdrawals from inherited pensions after age 75, creating the possibility of a double layer of taxation.
The government is continuing to consult on the detailed operation of the new rules, including how IHT and Income Tax will interact. While some uncertainty remains around the final mechanics, the overall direction is now clear.
Who is most likely to be affected?
These changes are likely to affect anyone with pension savings they may not fully spend during their lifetime.
You may be particularly impacted if:
- Your estate is already close to or above the IHT threshold
- You have deliberately preserved pension assets for inheritance purposes
- You hold substantial defined contribution pension savings
- Your property and investment assets already create potential IHT exposure
- You intend to leave wealth to children or grandchildren
Even individuals who currently fall below the IHT threshold may find their estate exceeds it once pension assets are included.
For many long-term pension savers, this will be the first time their retirement fund has formed part of their estate planning calculations.
Planning opportunities before 2027
Review your retirement income strategy
Many retirees have historically prioritised spending non-pension assets first because pensions offered more favourable inheritance treatment.
From April 2027, that approach may no longer be the most tax-efficient.
Drawing more income from pensions during retirement, including using available tax-free cash, could help reduce the size of the pension fund eventually exposed to Inheritance Tax.
The right strategy will depend on your wider financial circumstances, tax position and long-term objectives.
Consider lifetime gifting
Making gifts during your lifetime can reduce the value of your estate for Inheritance Tax purposes.
Current rules allow:
- Gifts of up to £3,000 each tax year using the annual exemption
- Larger gifts to fall outside your estate after seven years, provided you survive the period
- Potentially exempt transfers and gifts made from surplus income in some circumstances
For some individuals, drawing funds from a pension and gifting them strategically may become more attractive under the new regime.
Review Life Insurance arrangements
A life insurance policy written in trust can provide beneficiaries with funds to meet an anticipated Inheritance Tax liability without forcing the sale of investments or property.
If pension assets now increase the expected tax burden on your estate, it may be sensible to review whether your existing cover remains appropriate.
Explore wider estate planning options
Depending on your circumstances, additional planning strategies may be available, including:
- Trust arrangements
- Business Relief qualifying investments
- Pension beneficiary nomination reviews
- Intergenerational gifting strategies
- Asset ownership restructuring
These areas are complex and should always be considered carefully with professional advice.
Why early planning matters?
Effective estate planning rarely happens overnight.
Many of the most valuable Inheritance Tax mitigation strategies work over time, particularly where gifting rules and seven-year exemptions are involved.
Waiting until 2027 could significantly reduce the options available to you.
Reviewing your pension and estate planning strategy now may help ensure your wealth is passed to future generations as efficiently as possible, while still maintaining your own financial security in retirement.
How can we help?
The upcoming pension changes represent one of the most significant shifts in estate planning in recent years and, for many individuals, may require a complete review of how retirement assets are structured and passed on.
At Lathe & Co, we work closely with clients to ensure their retirement and estate planning strategies remain aligned with both their long-term objectives and changing legislation.
We can help you:
- Understand how the new rules may affect your estate
- Review how you draw income in retirement
- Assess potential Inheritance Tax exposure
- Explore appropriate estate planning strategies
- Build a long-term plan aligned with your family and financial goals
Every situation is different, and the right approach will depend on your assets, family circumstances, retirement objectives and attitude towards gifting and legacy planning.
If you would like to discuss how these changes may impact your financial plan, please get in touch with our team.
Important Information
This article is for general information only and does not constitute personal financial advice. The information is based on our understanding of current legislation and proposed changes as at May 2026, which may be subject to change.
The Financial Conduct Authority does not regulate Inheritance Tax planning, estate planning or trust advice.
Tax treatment depends on individual circumstances and may change in the future.
A pension is a long-term investment. The value of investments can fall as well as rise and you may get back less than you invested.
You cannot normally access pension benefits before age 55, rising to age 57 from April 2028.
HM Revenue & Customs practice and tax legislation are subject to change and depend on individual circumstances.
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