In the 2024 Autumn Budget, the government confirmed that most unused pension funds will be included in estates for inheritance tax from 6 April 2027. This is the most significant change to estate and retirement planning in a generation.
If you have a pension and your estate is likely to be above the IHT threshold, this change affects you. It needs your attention now.
What is the current position?
At the moment, most pension funds sit outside your estate for IHT. When you die, your pension can be passed to beneficiaries without IHT being charged on the fund. Many people have structured their estate planning around this, spending from other assets first and leaving the pension to pass free of IHT.
From 6 April 2027, this ends. Unspent pension funds will be added to your estate and valued for IHT alongside your property, investments and other assets.
Who is affected?
Anyone whose total estate, now including their pension, exceeds their available nil-rate bands. The standard nil-rate band is £325,000 per person. The residence nil-rate band adds up to £175,000 per person where a home passes to direct descendants, so a married couple can potentially shelter up to £1 million between them. Everything above the available bands is taxed at 40%.
In Surrey, where property values are high and many professionals and business owners have built substantial pensions, a large number of families are affected.
The government estimates that in 2027/28, around 10,500 additional estates will face a new IHT liability because of this change, and around 38,500 will pay more IHT than before.
The double tax problem
The change creates a potential double tax issue for larger estates. IHT at 40% will be charged on the pension as part of the estate. When beneficiaries then draw from the inherited pension, they also pay income tax at their marginal rate. For estates above the threshold, the combined effective tax rate on pension assets could exceed 60%.
What you can do now
- Review your drawdown strategy. The traditional approach of spending from ISAs and investments first and leaving the pension until last may no longer be optimal. Drawing from the pension earlier in retirement, while allowing other assets to grow, may reduce the overall tax burden on your estate.
- Use gifts from surplus income. If you draw from your pension and your income exceeds your living costs, gifts from that surplus income are immediately exempt from IHT, with no seven-year rule and no limit. This is one of the most powerful and underused planning tools available.
- Consider life insurance in trust. A policy written in trust provides an immediate lump sum to your beneficiaries on death, available to pay an IHT bill without assets needing to be sold or the estate delayed.
- Act now rather than later. Planning started now is more effective than planning started closer to the deadline. Many strategies, gifting programmes and trust structures especially, are more effective the earlier they begin.
Further strategies, including Business Property Relief, trusts and coordinated gifting programmes, are covered on our Inheritance Tax Planning page.
Book a pension and IHT review
The sooner you review your position, the more options you have. We are helping clients plan for the April 2027 change now, with a clear picture of what it means for their estate and the actions available to them.
Book a free pension and IHT review
Frequently asked questions
Will my pension be subject to inheritance tax from April 2027?
Yes. From 6 April 2027, most unused pension funds will be included in estates for inheritance tax. This is confirmed in the Finance Bill 2025-26 and is the most significant estate planning change in a generation.
What is the inheritance tax nil-rate band?
The standard nil-rate band is £325,000 per person, frozen until at least 2030. The residence nil-rate band adds up to £175,000 per person for qualifying property left to direct descendants. A married couple can shelter up to £1 million between them.
What is the 60% tax trap on inherited pensions?
For estates above the threshold, a pension can be taxed twice: 40% inheritance tax as part of the estate, then income tax at the beneficiary’s marginal rate when they draw from the inherited fund. Combined, the effective tax rate on those pension assets can exceed 60%.
How do gifts from surplus income work?
Regular gifts made from your income, not your capital, that do not reduce your standard of living are immediately exempt from IHT. There is no seven-year rule and no upper limit. For someone drawing a pension that exceeds their living costs, this can move significant sums out of the estate each year.
What should I do if I think I am affected?
Review your position before April 2027. The earlier you plan, the more options are available, particularly gifting programmes and trust structures, which are more effective the longer they run. A financial adviser can model your estate and set out the specific actions that apply to your circumstances.
This article is for general information only. It is not personal advice. Tax treatment depends on individual circumstances and may change. The April 2027 pension IHT rules are confirmed in the Finance Bill 2025-26 and are subject to parliamentary approval. Asquire Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (FCA reference no. 671841).
