Inheritance Tax Pension Changes: How to prepare for 6 April 2027?

The government has announced a significant shift in the inheritance tax on pensions, with new rules set to take effect from 6 April 2027. These changes will alter the inheritance tax treatment of pension savings and could have a notable impact on estate and financial planning for certain individuals.

Before exploring the implications, it’s worth revisiting the current rules to understand what’s changing and why it matters.

Understanding the Current Rules

At present, pension savings fall outside of your estate for inheritance tax (IHT) purposes. This means that, in many cases, pensions can be passed on to beneficiaries without incurring an IHT charge.

If you die before the age of 75, your pension and any associated death benefits can often be transferred entirely tax-free. After 75, the recipients pay income tax on withdrawals, but there’s still no inheritance tax due.

Furthermore, trusts allow you to transfer assets out of your estate while maintaining control over how they are managed and distributed. These arrangements are subject to their own tax rules but remain a useful tool for those looking to pass on wealth efficiently and with added flexibility.

What’s Changing from April 2027

From 6 April 2027, the inheritance tax rules on pensions will change. Unused pension funds will start to be included in the value of your estate for IHT purposes. This marks a significant shift in how pensions are treated and will have a significant impact on those that are currently using their pension scheme as part of their longer-term wealth transfer plan.

This policy change is aimed at discouraging the use of pensions primarily as an inheritance planning vehicle, rather than for retirement income. At the same time, HMRC has indicated that further updates to the taxation and reporting of trusts are on the way, reinforcing the need for up-to-date advice and careful planning. These combined reforms represent one of the most meaningful sets of inheritance tax pension changes in recent years.

How will these pension changes affect you?

While the changes are substantial, the majority of people will not be directly impacted. The Government estimates suggest that around 10,500 individuals will become liable for inheritance tax for the first time, and a further 38,500 are expected to face higher IHT bills as a result.

Those most likely to be affected are individuals with sizeable pension pots and estates already approaching or exceeding the nil-rate band. However, this shift in policy could also affect people who weren’t previously focused on inheritance tax, especially those with private pensions, ISAs, or property wealth.

Even if your estate may not be caught initially, it’s worth remembering that thresholds have been frozen since 2009, but the value of assets has continued to rise due to inflation. Which means that more estates will start to become affected over time.

Financial planning implications

If you’re married or in a civil partnership, you’ll still be able to leave your pension to your spouse or civil partner free of inheritance tax. But from April 2027, any remaining pension funds left to other beneficiaries could be pulled into your estate and taxed at 40 percent if your estate exceeds the inheritance tax threshold.

Currently, pensions sit outside your estate for inheritance tax purposes. Which is the main reason many people choose to spend other savings first and preserve their pension. From 2027, this may no longer be the most tax-efficient option as pensions will be treated like other assets in your estate. Furthermore, if you pass away aged 75 or over, your beneficiaries could face income tax on anything they withdraw at their own personal tax rate on top of any inheritance tax due. That’s a potential double tax hit.

Matthew Whittam, Financial Adviser at Hawsons Wealth Management, says:
“These changes mean you may need to reconsider the order in which you draw down your assets. There are still planning opportunities available and the sooner they can be implemented the better’.

How Hawsons Wealth Management Can Support You

Planning for the upcoming inheritance tax changes on pensions isn't straightforward, and the right approach will vary from person to person. Taking independent financial advice ensures your plans reflect your full financial picture, helping you make informed decisions that protect both your wealth and your loved ones.

At Hawsons, our Wealth Management team works hand in hand with our specialist tax advisers to provide a joined-up, personalised advice. We help clients across all life stages understand the implications of new tax rules and make confident, well-informed decisions.

If you would like to explore what these changes might mean for you, we’re always ready to help.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension income or withdrawals available.  Your pension income could also be affected by the interest rates at the time you access your pension. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. The content on this page does not constitute financial advice. You should seek advice to understand your options at retirement.

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