Pensions and inheritance tax — the 2027 change
From April 2027, most unspent pension pots will count towards your estate for inheritance tax. Here's what that actually means, who it affects, and what people in the path of it are starting to think about.
From 6 April 2027, most unspent UK pension pots will count as part of your estate for inheritance tax purposes. This is one of the biggest single changes to UK pension and estate planning in decades. If your plan involved leaving a substantial pension pot to your kids or partner intact, that plan needs to be re-examined.
Until now, defined contribution pensions (SIPPs, workplace personal pensions) have been outside the IHT net. People used pensions as a way to pass wealth down efficiently — spend the ISA and the GIA in retirement, leave the pension. From April 2027, that strategy inverts.
What actually changes
From the effective date, the value of your unused pension on death will be added to the rest of your estate. If the total exceeds the IHT thresholds (currently £325,000 nil-rate band, plus up to £175,000 residence nil-rate band when leaving a home to direct descendants — so up to £500,000 for a single person, or £1,000,000 for a married couple), the excess gets taxed at 40%.
On top of that, any income tax that would have been due on the inherited pension when drawn by the beneficiary still applies. So for a higher-rate-taxpayer beneficiary, the combined effective rate on inherited pension above the IHT threshold can land unpleasantly close to 60-70%.
Who this actually affects
Most working-age UK adults will not be over the IHT threshold even with this change. The combined threshold for a married couple leaving a home to children is around £1 million. If your total estate (including pension, property, investments, savings) is well below that, the change doesn't materially affect your planning.
The people most affected are those with substantial pension pots (often £500k+) plus property in expensive areas. For them, the standard advice has been "max the pension, leave it to grow, draw last". From April 2027, that advice gets re-examined.
What people in scope are starting to think about
Three broad strategic responses are showing up in the planning conversations. First, drawing the pension earlier and either spending it or gifting it during life (the seven-year gift rule still removes gifts from the IHT estate if you survive seven years). Second, using more ISA and pension contributions in tandem rather than maxing pension first — keeps wealth more flexible. Third, life insurance written in trust as IHT mitigation, which sits outside the estate.
Honest caveat: at meaningful estate sizes, this is regulated financial planner territory. The decisions involve income tax, pension rules, IHT, trust law, and your specific family situation — and they're reversible only with significant cost. Theo can help you frame the question; an IFA or chartered planner should help you answer it. The FCA register at register.fca.org.uk lets you check anyone is properly authorised.
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