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THE 2027 INHERITANCE TAX ON PENSIONS CHANGES

Understanding the 2027 Inheritance Tax Change on Pensions

From 6 April 2027, most unused defined contribution pensions will be included in your estate for inheritance tax (IHT) purposes. This is a significant shift from the current rules - and it means that wealth held in your pension may now be taxed at 40% when you die.
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THE 2027 INHERITANCE TAX CHANGES

What’s Changing?

From 6 April 2027:
Most unused defined contribution pensions (such as SIPPs and workplace pensions) will count towards the value of your estate when you die.
If your estate exceeds your IHT allowance, the excess - including pension value - could be taxed at 40%.
Previously, most pensions fell outside of your estate and could be passed on tax-free.
This change aims to close the “pension tax loophole” and bring pensions in line with other forms of wealth for inheritance tax purposes.
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TAX ON PENSIONS ADVICE

Which Pensions Are Affected by IHT?

The new rule applies primarily to:
Defined contribution (DC) pensions – including personal pensions, SIPPs, and workplace pensions
Unused pension funds – any value left in your pot at the time of death
Lump-sum death benefits – paid to beneficiaries from uncrystallised or drawdown funds
These are NOT affected:
Defined benefit (DB) schemes – such as final salary pensions
Death-in-service benefits – lump sums paid by employers when someone dies while still working
Pensions left to a spouse, civil partner, or charity – remain exempt from IHT
THE 2027 INHERITANCE TAX CHANGES

Who Pays the Inheritance Tax on Pensions?

Under the new rules:
Executors of the estate will be responsible for reporting and paying IHT on pensions
HMRC will provide a system allowing IHT to be paid directly from the pension fund before it is distributed
This means families may not need to find cash to cover the tax - but tax will still be deducted
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THE 2027 INHERITANCE TAX CHANGES

What Does This Mean for Your Family?

Without planning, your pension could be taxed at 40% upon death. For example:
If you leave a £500,000 pension untouched, and your estate exceeds the IHT threshold, your beneficiaries could face a £200,000 tax bill.
This rule could result in tens or hundreds of thousands in tax that could otherwise have been avoided.
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TAX ON PENSIONS ADVICE

Are Any Exemptions Still Available?

Yes - the following IHT exemptions still apply:
You can pass on assets to a spouse, civil partner, or registered charity free from IHT
The nil-rate band remains at £325,000 per person (or up to £500,000 including the residence nil-rate band)
These allowances can be combined between spouses to potentially shield up to £1 million of an estate
However, pensions are now included in the estate total, which could push more families above the limit.
inheritance tax ADVICE

Why Is the Government Making This Change?

The change was confirmed in 2025 following years of policy debate. Pensions had become a popular inheritance tax planning tool - but the government saw this as a loophole.

By bringing pensions into IHT, the government aims to ensure that all wealth is taxed more fairly - especially among higher-value estates.
THE 2027 INHERITANCE TAX CHANGES

What You Can Do Now to Avoid IHT Tax on Your Unused Pensions

There are still options to protect your pension and reduce your IHT liability. These include:

Withdrawing From Pension to Fund Life Insurance That Covers Your IHT Liability

Reviewing How Your Pension Death Benefits are Structured

Gifting Wealth Over Time to Reduce Your Estate Size

Financial Plan in Place With a Qualified IHT Adviser

Without proper Inheritance Tax Planning, up to 40% of your estate could go to HMRC instead of your loved ones. Our expert guidance on IHT, trusts and tax-efficient strategies can help you safeguard your assets and ensure more of your wealth goes to your family - not the taxman.
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TAX ON PENSIONS ADVICE

What Happens Next?

Further guidance and technical details are expected in the 2025 Autumn Budget. However, the core policy has already been confirmed.

Planning ahead gives you the most options - waiting until the change is in place could limit your choices and cost your family thousands.
THE 2027 INHERITANCE TAX CHANGES

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Tax treatment varies according to individual circumstances and is subject to change.

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Inheritance Tax on Pensions is a trading style of Beals Mortgage and Financial Services Ltd an appointed representative of Quilter Financial Services Limited which are authorised and regulated by the Financial Conduct Authority.

The guidance and/or information contained within this website is subject to the UK regulatory regime and is therefore targeted at consumers based in the UK.

Approver Quilter Financial Services Limited August 2025

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