The changing Inheritance Tax treatment of pensions in the UK

From 06 April 2027, the UK will introduce one of the most significant reforms to pension taxation in decades: most unused pension funds will be brought into scope for Inheritance Tax (IHT). This marks a major shift away from the long‑standing principle that pensions sit outside an individual’s taxable estate and can be passed on tax‑free.

Why the rules are changing

The government has stated that pensions have increasingly been used as inheritance planning vehicles, rather than solely for funding retirement. The Autumn Budget 2024 set out the intention to remove distortions and inconsistencies in how different pension types are treated for IHT.

What exactly is changing?

1. Unused pension funds will form part of the taxable estate

From April 2027, most unused defined contribution pension funds will be included in the value of a deceased person’s estate for IHT purposes.

This means that:

• Any unspent pension savings may now be taxed at 40% if the total estate exceeds the standard £325,000 nil‑rate band, plus any applicable residence nil‑rate band.

2. Personal representatives (PRs) will be responsible for reporting and paying IHT

PRs will need to:

• Report pension assets to HMRC
• Pay any IHT due

Who will be affected?

Although the government estimates that only around 8% of estates will be affected, the impact will be concentrated among:

• Individuals with significant pension savings
• Homeowners whose combined estate value exceeds IHT thresholds
• Families inheriting unused pension pots that previously would have been tax‑free

How to prepare for the 2027 changes

1. Review your retirement withdrawal strategy

If your goal is to minimise IHT, it may make sense to draw from your pension earlier and preserve other assets that remain outside the IHT net.

2. Reassess the role of ISAs

ISAs remain entirely free from income tax and capital gains tax, and—crucially—are not subject to IHT when passed to a spouse or civil partner. Many savers may shift focus toward ISA accumulation.

3. Consider lifetime gifting

You can give away:

• £3,000 per year tax‑free
• Unlimited small gifts of up to £250
• Regular gifts from surplus income

These strategies may help reduce the taxable value of your estate.

4. Seek professional advice

Financial planners emphasise the importance of early preparation, especially for those with large pension pots or complex estates.

Conclusion

The inclusion of unused pension funds within the scope of inheritance tax from April 2027 represents a fundamental shift in UK retirement and estate planning. While only a minority of estates will ultimately pay IHT, the change removes a major tax advantage previously associated with pensions and will reshape how many people plan for later life.

Those likely to be affected should begin reviewing their financial arrangements now—well ahead of the rule change—to ensure their retirement income and inheritance plans remain aligned with their goals.

Register for our upcoming webinar ‘Pension shake up: How you could be affected‘ on 13 May 12-1pm to hear more on the changes to pension taxation.