If you’ve built a pension pot worth £1 million or more, congratulations. That represents years of discipline, investment, and financial planning. But from April 2027, the way your pension is treated on death is changing dramatically.
For the first time, unused pension funds will be included in your estate for inheritance tax (IHT). That means your £1m+ pension could be hit by a 40% tax bill, on top of potential income tax charges when beneficiaries draw it down. For high-net-worth families, this could mean losing hundreds of thousands of pounds unnecessarily.
In this guide, we explain the new rules, what they mean for seven-figure pensions, and the advanced planning strategies that could help you keep more of your wealth in your family’s hands.
Important: The information in this article relates to UK tax rules only and is intended as general guidance. It does not constitute financial advice. Tax treatment depends on your individual circumstances and may change.
What Are The 2027 Changes to Inheritance Tax?
Currently, most defined contribution pensions fall outside of IHT. That’s why many wealthy individuals have used pensions as a key estate planning tool.
From 6 April 2027, however, unused pensions will be added to the value of your estate when calculating IHT (pensionsage.com). This applies whether you die before or after retirement, regardless of whether you have accessed your pension.
At that point, your pension savings will be treated like any other asset.
- Estate value up to allowances = no IHT.
- Anything above = taxed at 40%.
Tax note: Tax treatment varies according to individual circumstances and may change.
Why £1m+ Pensions Are Most Exposed to Inheritance Tax
The nil-rate band (NRB) of £325,000 and the residence nil-rate band (RNRB) of £175,000 mean an individual can potentially pass on £500,000 tax-free. For couples, this doubles to £1m.
But if your pension alone is worth £1m, you have already used up that allowance before even considering your property, investments, or business assets.
Inheritance Tax 2027 Example: The £1.8m Estate
- Pension: £1,000,000
- House: £600,000
- Savings: £200,000
- Total estate: £1.8m
- Single person:
Allowances = £500k
Taxable = £1.3m
IHT liability = £520,000 - Married couple:
Combined allowance = £1m
Taxable = £800k
IHT liability = £320,000
These figures show why £1m+ pensions are firmly in the crosshairs of this reform. Even couples who maximise allowances will see significant portions of their estates taxed.
Investments and pensions risk: The value of investments and the income they produce can fall as well as rise. You may get back less than you invest.
The Double-Tax Trap (Inheritance Tax and Income Tax)
Inheritance tax is not the only problem. Pensions also carry income tax rules for beneficiaries:
- If you die before age 75, beneficiaries can usually take money from your pension free of income tax.
- If you die after 75, withdrawals are taxed at their marginal income tax rate.
From 2027, this means many families will face IHT at 40% first, followed by income tax at 20%, 40% or 45% on withdrawals.
Example:
£1m pension left to adult children when you die at 78:
- £400k taken in IHT (40%).
- Remaining £600k taxed on withdrawal, for example at 40% for a higher-rate taxpayer = another £240k.
- Net inheritance = £360k.
That means 64% of the pension lost to tax.
Advanced IHT Planning Strategies for High-Net-Worth Pension Holders
If your pension exceeds £1m, you need to think differently about estate planning. Here are some strategies worth exploring with professional advice:
Review and update your pension beneficiaries
Spouses and civil partners remain exempt from IHT. Leaving your pension directly to them can defer the tax hit, but it will still apply when the second spouse dies. Careful multi-generational planning is key.
Adjust Withdrawal Strategies
It may be more efficient to draw down pension funds earlier, pay income tax during your lifetime, and reinvest in assets outside of the pension that can be given away or structured for IHT efficiency.
Lifetime Gifting
Making gifts during your lifetime reduces the size of your taxable estate. Some gifts are immediately exempt, while larger ones may fall outside IHT if you survive seven years.
Tax note: Gifts must be affordable and planned carefully. Seek advice before making large transfers.
Life Insurance in Trust
High-value estates often use whole-of-life insurance policies, written in trust, to cover anticipated IHT bills. For a £1m+ pension, this can mean your heirs inherit a tax-free lump sum to offset the liability.
Trusts and Family Investment Companies
For some, placing assets into trusts or family investment companies can help manage wealth across generations. These are advanced solutions requiring specialist advice.
Business Relief Investments
Certain qualifying investments (such as AIM-listed shares in trading companies) may be exempt from IHT after two years. These are higher-risk but can be part of a diversified estate plan.
Business Relief products invest in assets that are high risk and can be difficult to sell. The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.
Important: Inheritance Tax Planning, Estate Planning and Trusts are not regulated by the Financial Conduct Authority.
Check Your IHT Liability With Our Free Inheritance Tax Calculator
If you have a pension over £1m, it is essential to know how the 2027 rules could affect you. Use our free IHT calculator to estimate your liability and see just how much of your estate could be lost to tax.
Tax treatment varies according to individual circumstances and is subject to change.
The information provided is for general information only and does not constitute financial advice.
Why IHT Planning Now Matters
These changes do not come into force until April 2027, but waiting until then could cost your family dearly. Acting now gives you time to:
- Restructure your pension withdrawals.
- Put protection in place.
- Reorganise your estate to reduce the future tax burden.
The earlier you plan, the more options you will have available.
Speak to us for FCA Registered, Plain English IHT Advice
At Beals Wealth Management, we work with retirees and high-net-worth individuals to protect their wealth from unnecessary tax. As FCA registered financial planners, we will explain your options clearly and help you design a strategy that fits your goals, whether that is enjoying your retirement, supporting your children and grandchildren, or leaving a lasting legacy.
Book a no-obligation pension and estate review today and take control of your future before the 2027 rules come into force.
Frequently Asked Questions
Will pensions be subject to inheritance tax in 2027?
Yes. From April 2027, most unused pension pots will be counted as part of your estate and may be subject to inheritance tax at 40%.
Can I avoid inheritance tax on my pension?
You may be able to reduce liability by reviewing beneficiaries, drawing down pensions during retirement, using allowances, or exploring life insurance and estate planning. Always seek professional advice.
Do the new IHT changes apply to all pensions?
No. Defined benefit pensions and death-in-service benefits are treated differently, and money left to a spouse or charity is generally exempt.
Inheritance Tax Planning, Estate Planning and Trusts are not regulated by the Financial Conduct Authority.
Approver Quilter Financial Services Limited. September 2025