By Giliker Flynn – Family-run independent financial advisers, helping families plan securely for the future.
Why This Change Matters
For years, pensions have been one of the most tax-efficient vehicles for passing on wealth in the UK. Unlike most other assets, defined contribution pensions have historically been excluded from IHT calculations.
This allowed individuals to:
Leave their remaining pension pot to loved ones, often free from inheritance tax
Plan their estate around property, investments and ISAs while keeping pensions outside the estate
Use pensions as a primary intergenerational wealth transfer tool
From 6 April 2027, that changes. Unused pension funds will be brought into the scope of IHT — potentially exposing thousands of families to higher tax bills.
A Quick Refresher: How Pensions and IHT Work Today
Under current rules (2025):
If you die before age 75, your defined contribution pension can usually be passed on tax-free to your nominated beneficiaries.
If you die after age 75, your beneficiaries pay income tax at their marginal rate when they withdraw the funds, but there’s still no IHT.
The value of your pension is not counted as part of your estate for IHT purposes.
Pension death benefits are paid at the discretion of the scheme trustees or administrators, which helps keep them outside the estate.
This combination made pensions an incredibly powerful estate planning tool.
What’s Changing from April 2027
Under the government’s reforms, announced in the 2024 Autumn Statement:
Unused pension pots and death benefits will be included in the taxable estate for IHT.
If your total estate — including pensions — exceeds the nil-rate band (£325,000) plus any residence nil-rate band, your beneficiaries may face IHT at 40% on the excess.
Death-in-service benefits are expected to remain outside IHT, but most personal pensions and SIPPs will be included.
Pension scheme administrators will need to report the value of pension death benefits to HMRC as part of the probate and IHT process.
This is a fundamental shift. Many people who previously assumed their pensions were “safe” from inheritance tax may now face significant estate planning challenges.
Why the Government Is Making This Change
Several factors are driving the reform:
Raising revenue
Pensions represent trillions in total assets. Bringing unused pension pots into IHT could raise billions for the Exchequer without raising headline rates.Perceived fairness
Policymakers have argued that it’s unfair for wealthy individuals to pass on pension pots tax-free while other assets are taxed at 40%.Demographic shifts
More people are entering retirement with larger pension pots. Many die with substantial funds remaining, partly due to using ISAs and other savings for living costs.Political timing
The Labour government has framed the move as part of its “responsible fiscal stewardship” message — a politically safer way to raise revenue than increasing income tax.
Who Will Be Affected
While not everyone will face a tax bill, the change is likely to impact:
Those with larger pension pots — particularly above £500,000
Families with other significant assets, like property and investments
Individuals who planned to pass on pensions as part of their estate
Beneficiaries of SIPPs or drawdown plans, who may face both income tax and IHT
Importantly, even middle-income families could be pulled into the net if property values and pension pots combine to exceed IHT thresholds.
Example: How the Tax Could Bite
Let’s consider an example.
Jane dies in 2028 aged 78 with:
£600,000 in pension drawdown
£500,000 home
£200,000 in savings and ISAs
Total estate = £1.3 million
Current thresholds:
Nil-rate band: £325,000
Residence nil-rate band: £175,000
Total threshold: £500,000
Taxable estate = £800,000
IHT @ 40% = £320,000
Under current rules (2025), Jane’s pension would have been outside IHT — meaning a much lower or even zero IHT bill.
From 2027 onwards, her beneficiaries could face hundreds of thousands in additional tax.
Potential Grey Areas and Unanswered Questions
As with any major reform, there are technical details still being clarified. Among them:
How jointly held pensions or pension sharing on divorce will be treated
Whether beneficiary drawdown arrangements will face immediate IHT or only on second death
How trust-based pensions interact with the new reporting rules
Whether transitional protections will apply to existing arrangements
The Treasury has confirmed that consultation with the industry is ongoing, and technical guidance will be published ahead of the April 2027 implementation date.
Practical Implications for Estate Planning
This change forces a rethink for many retirement strategies.
1. “Pension as the last pot” strategy may no longer work
Many retirees intentionally spend down ISAs and savings first and leave pensions untouched, because they were outside the IHT net.
From 2027, this may no longer be optimal.
2. Gifting and lifetime planning become more valuable
You may want to consider:
Taking tax-free lump sums earlier
Gifting money during your lifetime (using the annual exemption or the 7-year rule)
Reviewing who your beneficiaries are and how your estate is structured
3. Trusts and alternative structures may help — with caveats
Trusts can offer flexibility but are not a magic bullet. Trust planning has its own tax considerations and must be done carefully.
4. Phased drawdown strategies can reduce the exposure
By gradually drawing down pension funds in retirement and using them efficiently, you may reduce the amount left in your estate when you die.
5. Couples should plan together
Coordinating withdrawals and estate planning with your spouse or civil partner can help maximise tax allowances.
Key Planning Strategies to Consider Before 2027
Take Lump Sums Strategically
If you’re over 55 and approaching retirement, taking some or all of your 25% tax-free lump sum before 2027 could:
Reduce the size of your pension pot subject to IHT
Allow you to gift or invest outside the pension wrapper
Lock in today’s allowances before any further rule changes
This should be done carefully and with financial planning, not knee-jerk withdrawals.
Review Your Will and Beneficiary Nominations
Beneficiary nominations do not override your will, but they play a crucial role in how pension death benefits are distributed. With IHT now in play, ensuring these are up to date and strategically structured is vital.
Gifting and Lifetime Transfers
Gifting during your lifetime can reduce the taxable value of your estate, particularly if you survive the 7-year rule for Potentially Exempt Transfers (PETs). But timing and documentation matter.
Intergenerational Planning
This reform will hit families as much as individuals. Many pension pots are passed to children and grandchildren. Coordinating your retirement income strategy with intergenerational gifting plans can mitigate IHT exposure.
Professional Advice Is More Important Than Ever
Pension tax, IHT and estate planning are already complex. Adding pensions into the IHT calculation only increases the need for:
Cashflow forecasting
Scenario modelling
Tax-efficient drawdown strategies
Coordinated estate planning
A well-structured plan can mean the difference between a 40% tax bill and thousands preserved for your family.
How This Affects Different Types of Pension Arrangements
Defined Contribution (DC) Pensions
Most affected. DC pensions, including SIPPs and workplace pensions, are currently excluded from IHT and will be brought into scope.
Defined Benefit (DB) Pensions
Less clear. Many DB schemes pay a dependant’s pension rather than leaving a lump sum. The Treasury is expected to clarify how these are valued for IHT purposes.
Death-in-Service Benefits
Expected to remain outside IHT as they are not technically part of the member’s estate. This could make employer-provided death benefits more valuable.
Case Study: A Family Planning Example
David and Susan are both 70.
They have:
£900,000 combined in pension drawdown
£600,000 home
£150,000 in ISAs
They want to leave the estate to their two children. Under the new rules, their estate could face a significant IHT bill.
Their adviser builds a strategy to:
Take partial tax-free lump sums over the next two years
Gift £200,000 using the 7-year rule
Rebalance assets between them to maximise allowances
Update wills and nominations
Result: A projected IHT saving of £180,000, while maintaining a comfortable income for life.
Why 2025–2027 Is a Crucial Window
The next 18–24 months offer an opportunity to plan ahead of the changes:
Secure tax-free cash under current rules
Gift strategically
Rework estate plans while allowances remain unchanged
Adjust drawdown strategies to reduce the taxable estate
For many families, acting before 6 April 2027 could mean saving a substantial portion of their legacy.
Our View at Giliker Flynn
We see the inclusion of pensions in IHT as one of the most significant estate planning shifts in decades.
It doesn’t mean panic or drastic action. But it does mean:
Reviewing your plan thoroughly
Not assuming your pension is “off the IHT radar” anymore
Making careful, informed choices in advance
Every family’s situation is unique — and a tailored strategy is almost always more effective than generic rules of thumb.
Practical Next Steps
Review your pension values and projected estate size.
Assess how the 2027 rules might impact your IHT exposure.
Consider drawing lump sums strategically before the rule change.
Review and update wills and nominations.
Work with an adviser to build a tax-efficient estate plan.
Revisit the plan annually — tax policy can shift again.
Conclusion
The 2027 inheritance tax reforms fundamentally change how pensions fit into estate planning in the UK.
For years, pensions have been a cornerstone of tax-efficient wealth transfer. Now, for many families, they could become a tax exposure instead. The good news is: with careful, early planning, it’s often possible to significantly reduce or even avoid unnecessary IHT charges.
If you’d like to understand how the 2027 changes could affect your family, speak to us at Giliker Flynn. We specialise in helping families make informed decisions that protect wealth across generations.
Important: Tax and pension rules can change, and their value depends on your circumstances. Always seek regulated financial advice.
Giliker Flynn is a family-run, independent financial advice firm helping families across the UK navigate pensions, tax and estate planning with clarity and confidence.