If you’ve saved a substantial pension (around £200,000 or more), upcoming changes to UK inheritance tax rules could affect how much of that pension your loved ones receive. The government is closing a loophole that previously allowed many pension pots to pass outside of inheritance tax (IHT). In this post, we explain what is changing, who is affected, and how you can prepare, all in plain English.
Important: The guidance in this article relates to UK tax rules only and is intended as general information. It does not constitute personal financial advice. Tax treatment depends on your individual circumstances and may change in future.
What is Changing in April 2027?
In the Autumn Budget 2024, the government announced that most unused pension funds and pension death benefits will be treated as part of your estate for IHT purposes from 6 April 2027. This means any money left in your pension when you die could be subject to inheritance tax, charged at 40% on amounts above the relevant thresholds.
Currently, most defined contribution pensions are not counted as part of your estate for IHT and are typically passed on tax-free. From 2027, this exemption will be removed.
This change applies regardless of age or circumstance. Whether you pass away before retirement age or long after, any unused pension money will be included in your estate value for tax. The policy is intended to ensure pensions are used for their intended purpose, funding retirement, rather than as a vehicle to transfer wealth (pensionsage.com).
Example: If you have £200,000 remaining in your pension when you die, that £200k will be added to the value of your other assets, such as property and savings, when calculating any inheritance tax due. If your total estate exceeds the tax-free allowance, 40% tax could be charged on the amount above the allowance.
Tax treatment depends on your personal circumstances and is subject to change.
Who Will Be Affected?
You might be thinking, “Does this really affect me? £200k isn’t that much these days.” It is true that most estates still will not pay inheritance tax. HMRC estimates over 90% of estates each year will not be liable even after this change (pensionsage.com). However, the reform is aimed at people with larger pension savings. Many professionals and retirees with pensions in the £200k+ range could get caught by IHT once pension savings are combined with property wealth (royallondon.com).
Every individual has a nil-rate band (NRB), which is the amount you can pass on tax-free. The standard IHT threshold is £325,000 and it has been frozen at that level until at least 2030. There is also the Residence Nil-Rate Band (RNRB) of up to £175,000 if you leave a home to direct descendants such as children or grandchildren.
These allowances can be combined for a couple. For example, a married couple can potentially pass on up to £1 million (£325k × 2 plus £175k × 2) free of IHT, provided the estate passes to children and both allowances are available. If you are single, or do not have children, your threshold may be £325k, or up to £650k if you are widowed and inherited a spouse’s unused allowance.
So Where Does a £200k Pension Fit In?
On its own, £200,000 is below the £325,000 NRB. If the pension were your only asset, your estate likely would not owe IHT. However, if you also own a home or have other savings, your total estate value could easily exceed the threshold.
Example:
➡️House £300k + investments £50k + pension £200k = £550k estate.
- A single person would be £225k over the £325k threshold. This could mean an IHT bill of around £90k (40% of £225k).
- A married couple might still find part of the estate taxable, using up a large portion of their combined allowances and leaving less room elsewhere.
The government’s own figures show that about 10,500 additional estates per year will have to pay inheritance tax for the first time due to this pension change, and around 38,500 estates that would already pay some IHT will end up paying more (royallondon.com).
These are likely to be estates in the middle-to-high wealth range, not billionaire estates, but ordinary families who have diligently saved into pensions and bought homes. If your pension is in the six figures, it is a sign that you should pay attention to these new rules.
Exclusions and Nuances
- Defined benefit (final salary) pensions usually are not inherited as a lump sum, so they are not affected in the same way.
- Death-in-service lump sums typically remain exempt from IHT.
- Assets left to a surviving spouse, civil partner or charity remain exempt. However, on the second death, remaining assets (including pension money) are assessed for IHT.
- Leaving your pension to adult children or other non-spouse beneficiaries may now trigger a 40% IHT charge where it previously would not.
The availability of allowances, such as the Residence Nil-Rate Band (RNRB), depends on meeting specific conditions and may taper for larger estates. Tax rules can change.
The Double-Tax Trap (Inheritance Tax and Income Tax)
For many, the new rules create a potential double taxation problem.
- If you die before age 75, your beneficiaries can usually withdraw inherited pension funds tax-free.
- If you die after age 75, beneficiaries pay income tax on withdrawals from the inherited pension at their own marginal rate.
Under the old system, that income tax was often seen as in place of IHT. From 2027, beneficiaries could face both: IHT first, then income tax on withdrawals.
Illustration:
You die at 78 with a pension left to your children. After the 40% IHT hit (if no spouse exemption applies), your children then pay income tax on what they withdraw. If they are higher-rate taxpayers, that could mean 40% or 45% income tax. In some cases, over two-thirds of a pension’s value could be lost to combined taxes.
The key point: the more you leave in your pension, and the older you are at passing, the greater the potential tax your beneficiaries may face.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invest.
How to Protect Your 200k+ Pension for Your Loved Ones
The good news is that you can take steps now to reduce the impact of these changes.
Review and update your beneficiaries
Check your pension nominations. Leaving your pension directly to adult children could incur a 40% IHT charge, whereas leaving it to a spouse or civil partner is exempt. Align your will with any changes to pension nominations
Use your pension for retirement
Your pension is meant to fund your retirement. With rules changing, there is less incentive to leave a large, untouched pension purely to pass on. Spending from your pension, or gifting money within allowances during your lifetime, reduces the amount potentially subject to IHT.
Larger gifts may be subject to the 7-year IHT rules. Seek advice before gifting.
Consider life insurance
A whole-of-life insurance policy written in trust can provide a lump sum outside your estate to help beneficiaries pay IHT. Many people use this strategy to “pre-fund” the tax liability, especially if arranged while in good health.
Explore other options
ISAs remain part of your estate for IHT but can complement pensions. Some investors draw down pensions and re-invest into assets that can be gifted or may qualify for Business Relief after two years. Others consider trusts or family investment companies. These are advanced strategies and should only be explored with professional advice.
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.
Check Your IHT Liability With Our Free Inheritance Tax Calculator
Not sure how these rules might affect you? Use our free Check your IHT liability calculator to see how much inheritance tax might be due under current rules compared with the 2027 rules. It is a quick way to understand your exposure.
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.
Speak to us for FCA Registered, Plain English IHT Advice
Inheritance tax planning can be complex, but you do not have to navigate it alone. As FCA registered financial planners, Beals Wealth Management can help you craft a strategy that minimises IHT while ensuring you maintain a comfortable retirement. The right plan might combine several of the approaches above, tailored to your goals and needs.
Book a free consultation to talk through your options in plain English and put a plan in place so you and your loved ones can face the future with confidence.
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%.
How will the 2027 inheritance tax changes affect pensions over £200k?
If your pension is worth over £200,000, it could push your estate above the inheritance tax threshold, meaning your beneficiaries may face a tax bill.
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 rules 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.
The Bottom Line
Pensions over £200k are no longer a free pass to leave money for your family without tax. From April 2027, unused pension funds will count towards your taxable estate. This means more families could face IHT bills, even some who never expected to.
The change aims to curb the use of pensions as wealth-transfer tools, but it may affect ordinary savers too. The good news is you have time to plan. By updating your beneficiaries, adjusting your withdrawal strategy, and considering protection and estate planning options, you can protect more of your wealth for the next generation.
Inheritance Tax Planning, Estate Planning and Trusts are not regulated by the Financial Conduct Authority.
Approver Quilter Financial Services Limited. September 2025