Government changes mean most unused pension savings will count towards your estate. If that happens, your family could face a higher tax bill, and your plans for passing on wealth may need to change.
If you’re reviewing your estate – or planning to – now is a good time to see how these changes could affect you, your loved ones, and your long‑term goals. We hope this article helps you in the process.
How pensions work today
Since pension freedoms were introduced in 2015, people have had far more flexibility over how they use their pension savings.
Under current rules, defined contribution pensions can often sit outside your estate for IHT purposes.
- If you die before age 75, pension death benefits are usually paid to beneficiaries tax‑free – provided scheme rules and HMRC conditions are met.¹
- If you die at 75 or over, your pension can still be passed on, but withdrawals are normally taxed at the beneficiary’s marginal rate of Income Tax.²
What’s expected to change from April 2027
From 6 April 2027, the government will bring most unused pension funds and certain death benefits into scope for Inheritance Tax.³
Pensions will move from being a useful IHT shelter to a much more visible part of your estate – and that has planning implications for many families.
What would this mean in practice?
From April 2027, the people handling an estate will need to report and pay any IHT due on unused pension savings, alongside other assets.³
Some protections should still apply:
- Assets left to a spouse or civil partner can usually pass free of IHT
- Pension funds left to other beneficiaries may form part of the taxable estate, potentially facing IHT at 40%, depending on allowances and exemptions³
Why the Residence Nil-Rate Band matters
One key area to watch is the Residence Nil‑Rate Band (RNRB) – an additional IHT allowance that may apply when a qualifying home is left to direct descendants, such as children or grandchildren.
At present:
- The standard nil‑rate band is £325,000 per person
- The RNRB can add up to £175,000 per person
- For couples, that can mean up to £1 million passed on before IHT is due
However, the RNRB starts to taper away once an estate exceeds £2 million – and it can be lost entirely for larger estates.⁴
The RNRB reduces by £1 for every £2 your estate exceeds £2 million.
Today, pensions are often excluded when assessing whether an estate breaches that £2 million threshold. From April 2027, most unused pension funds may be included – which could reduce or remove the RNRB for some families.
Why this could increase your tax bill
These changes could catch families off guard. A pension that once sat outside the estate could push total assets over key thresholds, increasing the IHT due and reducing what beneficiaries receive.
In some cases, beneficiaries may also face Income Tax on pension withdrawals after death if the pension holder dies at 75 or over.² ³
That’s why pensions shouldn’t be looked at in isolation – they’re part of a wider estate planning picture.
An example – how the numbers could change
Here’s a simplified illustration:
Total estate value: £2.7 million, including an £800,000 pension.
- Before April 2027 – the pension usually sits outside the estate, allowing the full Residence Nil‑Rate Band to apply
- After April 2027 – the pension forms part of the estate, pushing the total over £2 million and removing the RNRB
In this scenario, the IHT bill could rise from £360,000 to £820,000 – an increase of £460,000. The amount passed to beneficiaries falls as a result.
Figures are illustrative and depend on individual circumstances.
Why advice really matters
When tax rules change, it’s rarely helpful to look at one asset in isolation. A pension, your home, savings and investments all interact – and changes in one area can have knock‑on effects elsewhere.
A clear financial plan can help you:
- understand where you’re most exposed to IHT
- review whether your pension is still doing the job you want it to do
- make informed decisions, rather than rushed ones later
Next steps – and how we can support you
If these proposed changes raise questions for you, it might be helpful to start with these few steps:
- A good place to start is by checking that your pension expression of wish and beneficiary nominations are up to date.
- Review how your pension fits within your wider retirement and estate plan – and whether it’s still working in the way you intend.
- Look at the overall value of your estate against the available nil-rate bands to understand where you may be exposed.
We here to help you make sense of the detail, explore your options and plan with clarity. And we’ll always take the time to understand what matters most to you. So, if you’d like to talk things through, please get in touch.
Important information
Tax treatment depends on individual circumstances and may change in the future. Inheritance Tax and pension rules are complex. This article is for general information only and isn’t personal financial or tax advice. You should speak to your financial adviser – and, where appropriate, a qualified tax specialist – before taking action.
The Financial Conduct Authority doesn’t regulate Inheritance Tax advice.
Sources
1 HMRC, Tax on a private pension you inherit Tax on a private pension you inherit – GOV.UK
2 HMRC, Inheritance Tax: unused pension funds and death benefits Inheritance Tax on unused pension funds and death benefits – GOV.UK
3 HMRC, Inheritance Tax – thresholds and Work out and apply the residence nil rate band for Inheritance Tax Work out and apply the residence nil rate band for Inheritance Tax – GOV.UK
4 MoneyHelper, guidance on pension carry forward and annual allowance rules Carry forward pension allowance | MoneyHelper
