If you have a pension worth around £500,000 or more, you could be one of the groups most affected by the government’s upcoming inheritance tax reforms. From April 2027, unused pension pots will no longer sit outside of inheritance tax (IHT). Instead, they will be added to your estate and may be taxed at 40% above your allowances.
This is a major shift in how pensions are treated, and it could mean a much bigger tax bill for families who have worked hard to save. In this guide, we’ll break down what’s changing, how it could affect a £500k+ pension, and the steps you can take to protect more of your wealth for your loved ones.
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 Changes to Pensions in 2027?
Until now, most defined contribution pensions have been excluded from IHT calculations. That meant pension savings often passed tax-free to beneficiaries, making them a popular estate planning tool.
From 6 April 2027, this will change. Unused pension savings will be treated as part of your estate for IHT purposes. If the value of your total estate exceeds the tax-free thresholds, inheritance tax at 40% will be applied to the excess (pensionsage.com).
This rule applies whether you die before or after retirement age. Even someone who passes away young, before ever accessing their pension, will now have those savings counted in their estate.
Why £500k+ Pensions Are at Risk of Inheritance Tax
At first glance, £500k may seem like a strong but not excessive pension fund. However, once combined with property and savings, it can easily push an estate into taxable territory.
The Thresholds You Need to Know:
- Nil-Rate Band (NRB): £325,000
- Residence Nil-Rate Band (RNRB): £175,000 (if leaving your home to direct descendants)
Together, a single person can pass on up to £500,000 tax-free if they qualify for the RNRB. Couples can combine allowances, potentially passing on up to £1 million.
But here’s the catch: a £500k pension alone already eats up that full £500k allowance. Add in property wealth and savings, and suddenly you’re well over the limit.
Example:
- Pension: £500,000
- House: £400,000
- Savings: £100,000
- Total estate: £1,000,000
- Single person:
Allowance = £325k + £175k (if leaving a home to children) = £500k
Taxable estate = £500k
IHT liability = £200,000 (40% of £500k) - Married couple (using combined £1m allowance):
Estate of £1m fits within allowances, so no IHT on first death.
However, any further growth or additional assets could trigger tax on second death.
This is why £500k is such an important tipping point. For many households, pensions at this level plus even a modest home will lead to a significant IHT bill.
According to Royal London, around 10,500 estates per year will start paying IHT for the first time once pensions are included, while another 38,500 estates that already paid IHT will face larger bills (royallondon.com).
Tax note: Tax treatment varies according to individual circumstances and may change.
The Double-Tax Trap (Inheritance Tax and Income Tax)
For those with £500k+ pensions, the 2027 rules create the risk of two layers of tax.
- IHT first: 40% on the pension value as part of your estate.
- Then income tax: If you die after age 75, your beneficiaries will also pay income tax on withdrawals, at their own marginal rate.
Example:
A £500k pension left to children could see:
- £200k deducted in IHT (40%).
- Beneficiaries then taxed on withdrawals from the remaining £300k (20%, 40% or 45% depending on their income).
In some cases, more than two-thirds of the pension’s value could be lost to combined taxes.
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.
How to Protect a £500k+ Pension from Inheritance Tax
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 pensions to a spouse or civil partner is exempt from IHT. Leaving them directly to children could now mean a 40% tax charge.
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 Tax-Efficient Vehicles
Some investors draw down pensions and reinvest into ISAs or Business Relief-qualifying assets. Others consider trusts or family investment companies. These are complex strategies and carry risks, so professional advice is essential.
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
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 £500k?
If your pension is worth over £500,000, 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 of £500k or more will no longer escape IHT after April 2027. For many savers, this means that their pension, home, and savings combined could leave their family facing a substantial tax bill.
The key is to plan ahead. With careful beneficiary choices, a smart withdrawal strategy, and potentially life cover or alternative planning tools, you can protect more of your hard-earned wealth.
Speak to us at Beals Wealth Management for a no-obligation review of your pensions and estate. We are FCA registered and can help you build a clear, tailored plan that balances your retirement needs with your legacy goals.
Inheritance Tax Planning, Estate Planning and Trusts are not regulated by the Financial Conduct Authority.
Approver Quilter Financial Services Limited. September 2025