Pensions and Inheritance Tax from April 2027: What Is Changing and What You Can Do

For many years, pensions have been one of the most tax efficient things you could leave behind. Most unused pension pots and pension death benefits sat outside your estate for inheritance tax, which is why many people were advised to spend other savings first and leave their pension untouched.

That is changing. From April 2027, most unused pension funds and pension death benefits will be treated as part of your estate for inheritance tax purposes. In practical terms, the value left in a pension when you die will be added to everything else you own, such as your home, savings and investments, when working out whether inheritance tax is due.

The change was announced by the government in the Autumn Budget of 2024, and it gives people a period to review their arrangements before it takes effect. It applies to most defined contribution pension pots, such as personal pensions and many workplace schemes, and to certain lump sums payable from pensions when someone dies.

This does not mean everyone with a pension will pay inheritance tax. But it does mean that some families who would never have expected a bill may now face one, and it is a good moment to look again at your plans.

The headline rules in England and Wales are:

• Nil rate band: the first £325,000 of an estate is taxed at 0%.
• Residence nil rate band: up to a further £175,000 where your home, or your share of it, passes to your children or grandchildren. It is gradually reduced for estates worth more than £2 million.
• The rate: anything above the available allowances is usually taxed at 40%.
• Spouses and civil partners: what you leave to your husband, wife or civil partner is generally free of inheritance tax, and unused allowances can pass to the survivor. Together, a married couple or civil partners leaving their home to their children may be able to pass on up to £1 million without inheritance tax.

These allowances have been frozen for several years and are set to stay frozen for several more, while house prices and pension values have grown. That is one reason more estates are being drawn in.

You are most likely to be affected if your home, savings and investments already come close to your available allowances and you also have a sizeable pension you are unlikely to spend. In particular:

• Single people and unmarried couples. The spouse and civil partner exemption does not apply between unmarried partners, so a pension left to a partner you are not married to may be taxed.
• Larger estates near £2 million. Adding a pension may push an estate over £2 million, which starts to reduce the residence nil rate band. For some families that means losing part of the allowance on the home as well as paying tax on the pension.
• Those who planned around the old rules. If you deliberately left your pension untouched as an inheritance, it is worth checking whether that still makes sense.

If your pension passes to your husband, wife or civil partner, the spouse exemption should still apply, so no inheritance tax is usually due on the first death. The question becomes what happens on the second death.

Under the new rules, it falls to the personal representatives, the executors or administrators of the estate, to work out the total inheritance tax due and report it, including the pension. That means gathering values from every pension scheme as well as the rest of the estate.

For families, the practical points are:

• Executors will need full details of all pensions, so keep an up to date list of your schemes and providers with your will.
• Dealing with pensions may add time to estate administration, so clear records will really help.
• There are expected to be arrangements for tax relating to a pension to be paid from the pension itself, so executors are not left funding it from other assets.

The detailed rules have been developing, and we keep up to date so you do not have to. If you are an executor now, our probate team can guide you through it.

Inheritance tax is not the only tax to consider. Under the current rules, if the pension holder dies aged 75 or over, beneficiaries usually pay income tax on money they draw from an inherited pension, at their own rate. Before age 75, withdrawals have often been free of income tax.

From April 2027, some inherited pensions could therefore face both inheritance tax and income tax. How much that matters depends on the size of the pension, the age at death and who inherits, which is why it is worth looking at your own figures with a professional rather than relying on general rules of thumb.

For most families in our area, the home is the largest asset, and it often sits alongside a pension. Ways people commonly reduce the inheritance tax on property include:

• Making the most of both allowances. A will that leaves your home to your children or grandchildren, directly or through suitable trusts, can help secure the residence nil rate band.
• Using the spouse exemption well, so that both partners’ allowances are available on the second death.
• Downsizing. If you move to a smaller home or sell up, rules may still let your estate benefit from the residence nil rate band you would otherwise lose.
• Lifetime gifts. Gifts to individuals are usually outside your estate if you live for seven years after making them. Be careful with the home: if you give it away but keep living there rent free, it is generally still treated as yours for inheritance tax.
• Life insurance written in trust, which can provide money to pay a bill without adding to the estate.

Each of these has conditions and trade offs, including the need to keep enough for your own future and possible care. Our inheritance tax planning page explains how we help.

There is still time before April 2027, and a few straightforward steps can make a real difference:

1. Review your pension nominations. Check who you have nominated with each scheme, and that it fits with your will.
2. Review your will. Make sure it uses your allowances well, particularly the residence nil rate band. Our article on life events that mean it is time to update your will may help.
3. Get a rough picture of your estate, including your pensions, so you know whether inheritance tax is likely.
4. Talk to a regulated financial adviser before changing how you draw your pension. We are happy to work alongside your adviser or accountant.
5. Keep good records of pensions and gifts for your executors.

Death in service benefits paid through a registered pension scheme are expected to remain outside the inheritance tax estate under the new rules, and dependants’ scheme pensions are also expected to be excluded. Because these rules are detailed, please check your own position with us or your adviser.

Possibly, but not in a hurry. Drawing money out of a pension can create an income tax bill, and money you take out may still be in your estate unless you spend it or give it away effectively. Decisions about your pension should be made with a regulated financial adviser, alongside legal advice on your will and gifts, so the whole plan fits together.

Our Wills & Probate team, led by Partner Andrew Horwich with Associate Solicitor Thomas Jordan, helps families in Scunthorpe, Goole and across North Lincolnshire and the East Riding plan ahead with confidence. We can review your will, look at how your home and pension fit together, set up trusts where they help, and work with your financial adviser or accountant.

Find out more on our inheritance tax planning and will writing pages, or call us to arrange an appointment at our Scunthorpe or Goole office, by phone or by video.