UK Inheritance Tax Changes in 2027: How Your Pension Will Be Affected
Your pension beneficiaries could face a combined tax rate of 64% or higher from April 2027, as inheritance tax rules in the UK undergo a fundamental change. Pension funds have historically been excluded from your estate when calculating inheritance tax, but the situation will change in just over two years.
Starting 6 April 2027, HMRC will include unused pension funds in your estate's value to calculate inheritance tax. If your combined estate and pension savings exceed the inheritance tax threshold of £325,000, the excess will incur 40% IHT.
The UK government estimates that around 10,500 estates will face new inheritance tax charges as a result of these changes. You must understand how these reforms affect your estate planning to protect your beneficiaries from unexpected tax bills.
What's Changing with Inheritance Tax on Pensions from April 2027
The Finance Bill 2025-26 establishes the legal framework to treat unused pension funds as part of your estate for inheritance tax purposes. You will be deemed to have beneficial ownership of "notional pension property" immediately before death. This applies whatever discretion your pension scheme administrators or trustees have over death benefit payments.
Most personal and workplace pensions sat outside your estate before now due to discretionary trust structures used by pension schemes. This situation will change from 6 April 2027, when HMRC will combine the value of your unused pension funds with your other assets.
Personal representatives, namely executors or administrators of your estate, will be responsible for reporting and paying any inheritance tax due on pension assets. They must work with pension scheme administrators through the new Pension Inheritance Tax Payment Scheme.
The government introduced these changes because people are using pensions as intergenerational wealth transfer tools rather than for their intended purpose of funding retirement. Out of around 213,000 estates with inheritable pension wealth in 2027-2028, about 10,500 face an inheritance tax liability that they would not have faced before.
Important exemptions remain intact. Benefits passing to your surviving spouse, civil partner, or registered charities continue to be exempt from inheritance tax. Death in service benefits payable from registered pension schemes are excluded from these changes.
How These Changes Will Affect Your Pension and Estate
Your estate calculations could see a major increase in inheritance tax liability if you include pension wealth. When estate valuations include pension assets, they are expected to increase the average inheritance tax bill by around £34,000. Out of around 213,000 estates containing inheritable pension wealth in 2027-2028, roughly 38,500 will pay more inheritance tax than they would under current rules.
Beneficiaries over 75 face a harsh outcome. Your pension beneficiaries must pay income tax at their marginal rate on withdrawals if you die after reaching 75. This can reach 45%. Then, when combined with the 40% inheritance tax charge, the effective tax rate on pension wealth could hit 64% to 67% or higher for larger estates.
Estate values escalate quickly. A property worth £600,000, ISA savings of £200,000 and a pension pot of £400,000 creates a combined estate of £1.2 million. This pushes you well above the standard inheritance tax threshold and triggers a tax charge that would not have existed when pensions were outside your estate.
You've worked hard for what you want your family to receive. The last thing you want is the government ending up with more of it than they do.
What You Should Do Now to Prepare
Planning ahead requires you to review your whole retirement strategy, not just your pension in isolation. Many retirement plans have been built around preserving pensions for as long as possible. From 2027 onwards, this logic should be revisited. Drawing from your pension sooner while preserving ISAs or other taxable investments may create better outcomes in some cases. This logic applies to both your retirement income and inheritance tax efficiency.
Nearly one in five savers aged 65 or above have already started gifting money in response to these changes. Helping with costs like university fees or house deposits now serves a dual purpose: it supports your family while also reducing the size of your estate. Keep detailed records of any gifts. Include recipients, dates and values, as executors will need this information to calculate inheritance tax owed.
Review your beneficiary nominations on pension accounts. You may have nominated children or grandchildren because pensions currently sit outside your estate. Those designations may need updating. Directing pensions to a surviving spouse or civil partner could defer the inheritance tax charge until the survivor's death.
Consideraciones Finales
These 2027 inheritance tax changes represent the most important move to pension wealth transfer in decades. Waiting until 2027 to reassess your estate planning could get pricey for your beneficiaries.
Review your pension strategy now and adjust your withdrawal patterns and beneficiary nominations to minimise the combined tax burden.
FAQs
Q1. How much can I inherit without paying inheritance tax in the UK?
You can inherit up to £325,000 without paying inheritance tax under the standard nil-rate band. This threshold can increase to £500,000 for individuals (when including the Residence Nil Rate Band for passing on a main residence) and up to £1 million for married couples or civil partners who combine their allowances, provided certain conditions are met.
Q2. Will my spouse inherit my State Pension when I die?
Your spouse or civil partner may inherit part or all of your additional State Pension or lump sum under specific circumstances. This rule applies if you reached State Pension age before 6 April 2016 and either died while deferring your State Pension or started claiming it after deferring. You must have been married or in a civil partnership at the time of death for this provision to apply.
Q3. What tax rate will my beneficiaries face on inherited pensions from 2027?
From April 2027, beneficiaries could face a combined tax rate of 64% to 67% or higher on inherited pension wealth. This situation occurs when the 40% inheritance tax charge combines with income tax (up to 45% at the highest marginal rate) that beneficiaries must pay on pension withdrawals if you die after age 75.
Q4. Are there any exemptions to the new rules for pension inheritance tax?
Yes, important exemptions remain in place. Pension benefits passing to your surviving spouse or civil partner are exempt from inheritance tax, as are benefits left to registered charities. Additionally, death-in-service benefits payable from registered pension schemes are excluded from these inheritance tax changes entirely.
Q5. Should I withdraw from my pension earlier to reduce my inheritance tax liability?
This depends on your individual circumstances, but the traditional strategy of preserving pensions for as long as possible may need revisiting. In some cases, drawing from your pension sooner while preserving ISAs or other investments could create better outcomes for both your retirement income and inheritance tax efficiency.