Inheritance Tax Planning Advice

Inheritance Tax Pension Changes from 2027 Explained

From April 2027, significant changes to inheritance tax on pensions could affect how your wealth is passed on to your loved ones.

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For many years, pensions have been one of the most tax-efficient ways to pass on wealth. However, new government proposals mean that unused pension funds will soon be included in your estate for inheritance tax (IHT) purposes.

This page explains what the pension inheritance tax changes in 2027 mean, who will be affected, and what you can do now to protect your wealth.

What Are the Pension Inheritance Tax Changes in 2027?

Currently, most pension pots sit outside of your estate, meaning they are not subject to inheritance tax when you pass away.

However, from April 2027:

Pension funds will be included within your estate for IHT calculations

This could result in inheritance tax of up to 40%

More families may become liable for inheritance tax than ever before

These changes are designed to reduce the use of pensions purely as a wealth transfer tool, but they could have a major impact on retirement and estate planning.

How Pensions Are Taxed Now (Before 2027)

Under the current rules:

If you die before age 75, your pension can usually be passed on tax-free

If you die after age 75, beneficiaries pay income tax on withdrawals

Crucially, pensions are generally not included in your estate for inheritance tax

This has made pensions one of the most efficient ways to pass on wealth, particularly for inheritance tax planning.

How Much Inheritance Tax Could You Pay?

If pensions are included in your estate from 2027, your beneficiaries could face:

⚠️ 40% inheritance tax on amounts above the nil-rate band (£325,000)
⚠️ Additional exposure if your total estate exceeds £500,000–£1M+ thresholds

Example:
If your estate (including pension) is worth £600,000:

➡️ £325,000 = tax-free allowance
➡️ Remaining £275,000 could be taxed at 40%
➡️ Potential tax bill: £110,000

This is why reviewing your pension plans now is essential.

Who Will Be Affected by the Changes?

You may be impacted by the inheritance tax pension changes if:

You have a large pension pot

You planned to use your pension as a wealth transfer tool

Your total estate may exceed inheritance tax thresholds

You intend to pass wealth to children or non-spouse beneficiaries

Spouses may still benefit from tax exemptions, but broader family inheritance strategies could become significantly less efficient.

How to Avoid Inheritance Tax on Pensions

While the rules are changing, there are still strategies that may help reduce your inheritance tax liability:

Review Your Pension Strategy

Consider whether drawing from your pension earlier could reduce your taxable estate.

Use Gifting Allowances

You can gift assets during your lifetime to reduce your estate value.

Consider Trust Planning

Trusts can still play a role in managing how wealth is passed on.

Combine Pension & Investment Planning

Balancing pensions with ISAs and other investments may improve tax efficiency.

Seek Professional Advice

Inheritance tax rules are complex and evolving, tailored advice is essential.

What Should You Do Now?

With the 2027 pension inheritance tax changes approaching, now is the time to:

✔️ Review your pension and estate planning strategy
✔️ Understand your potential inheritance tax exposure
✔️ Put a plan in place to protect your wealth

At Beals Wealth Management, our advisers can help you navigate these changes and build a strategy that works for your long-term goals.

Book a free consultation today to review your pension and inheritance tax position.

Review Your Estate & Pensions Now

As financial advisers, we encourage you to review your estate planning in light of these upcoming changes. Understanding how unused pension savings may affect your IHT obligations is crucial for effective financial management. If you have any questions or need assistance with your financial planning, please don’t hesitate to contact us.

Our service includes a free review of your estate and pensions, which includes our recommendations. If you decide to accept our recommendations a fee may be charged.

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Case Study: IHT & 2027 Pension Changes

Case studies used are fictional and for illustrative purposes only.

Background

Julie, aged 72, passed away with a defined contribution (DC) pension valued at £600,000, alongside other assets totalling £950,000. Julie had intended to leave her pension untouched, believing it to be outside her estate for Inheritance Tax (IHT) purposes, while using her other assets to fund her retirement.

Current Position (Pre April 2027):

Total Estate Value: £950,000 (pension excluded for IHT)

Nil-Rate Band: £325,000.

Taxable Estate: £625,000 (after applying the nil-rate band)

IHT Liability: £250,000 (40% of £625,000)

From April 2027:

With the upcoming changes, Julie's pension will be included in her estate, raising the total value to £1,550,000.

New Taxable Estate Value: £1,225,000 (after applying the nil-rate band)

IHT Liability: £490,000 (40% of £1,225,000)

This case illustrates how the inclusion of pension savings in the estate for IHT calculations can significantly increase the tax liability for beneficiaries. It highlights the importance of reviewing estate planning strategies in light of upcoming changes to inheritance tax legislation.

Common Questions about Inheritance Tax and Pension Changes (Effective April 2027)

Will my pension be subject to Inheritance Tax from 2027?

From 6th April 2027, unused pension savings may be included in your estate for IHT purposes. This could affect how much tax your beneficiaries pay after your death.

What counts as an unused pension for Inheritance Tax?

An unused pension refers to pension savings that have not been accessed for income, such as those in a defined contribution pension pot or drawdown account.

Who is most likely to be affected by the 2027 pension and IHT changes?

Homeowners with substantial pension savings who have not yet drawn from their pension are most at risk of exceeding the IHT threshold under the new rules.

How will the new Inheritance Tax pension rules affect my estate planning?

The changes could increase your estate’s taxable value, especially if you have a large pension pot and property. Reviewing your estate planning strategy before 2027 is essential.

Can I avoid Inheritance Tax on my pension by taking income before 2027?

Taking pension income before the changes take effect may reduce the amount considered for IHT, but the right approach depends on your personal circumstances and financial goals.

The information provided is for informational purposes only and does not constitute financial advice.

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