Pensions and Inheritance Tax from 2027: what should you review now?

From 6 April 2027, most unused pension funds and pension death benefits will be included within a person’s estate for Inheritance Tax (IHT). If you’ve always planned to leave your pension untouched for the next generation, it’s worth reviewing whether that approach still works for you.

For a long time, pensions have played two roles.

First and foremost, they provide income for retirement. But because most pension death benefits have generally sat outside the estate for Inheritance Tax purposes, they’ve also become an important part of estate planning for some families.

That will change from 6 April 2027.

Most unused pension funds and pension death benefits will be brought into the value of a deceased person’s estate for IHT. The reform has now been legislated, with HMRC publishing further technical guidance in May 2026. (HMRC: Inheritance Tax on pensions technical note)

It’s a significant change. But it doesn’t mean everyone should suddenly start drawing down their pension or giving money away.

For many people, the most helpful response is much simpler: take another look at your financial plan.

How much do you need for your own retirement? What other assets do you have? Who would you like to support? And does the strategy you built under the old rules still make sense once pensions are included in the estate?

Those are the questions worth answering now.

What is changing to pensions and Inheritance Tax in April 2027?

For deaths on or after 6 April 2027, most unused pension funds and death benefits will become part of the estate for IHT. Some exceptions remain, including death-in-service benefits from registered pension schemes, and existing exemptions such as the spouse or civil partner exemption can still apply.

At the moment, most discretionary pension death benefits generally sit outside a person’s estate for IHT. (HMRC: current treatment of pension death benefits)

From 6 April 2027, that position changes.

There are some important exceptions.

HMRC has confirmed that death-in-service benefits from registered pension schemes will remain outside the scope of IHT. Existing exemptions can also remain relevant, including where pension wealth passes to a spouse or civil partner. (HMRC: pensions technical note)

It’s also worth remembering that IHT and Income Tax are separate.

The existing tax treatment of inherited pensions can still depend on factors such as the age at which the pension holder dies and the way benefits are paid. (GOV.UK: tax on a private pension you inherit)

So from 2027, some families may need to think about both taxes together rather than looking at their pension in isolation.

Why have pensions traditionally played such an important role in estate planning?

Pensions are there to fund retirement, but their favourable treatment on death has also made them useful for passing wealth on. Some families have therefore chosen to spend other investments first and preserve their pension for beneficiaries.

Imagine reaching retirement with several different pots of money:

• a home
• cash savings
• ISAs and other investments
• a defined contribution pension

Until now, the order in which you use those assets could make a meaningful difference to the eventual estate.

ISAs and many other investments normally form part of the estate for IHT. Most discretionary pension death benefits have traditionally been treated differently.

That meant some families deliberately drew on savings and investments first, while allowing pension wealth to remain invested.

HMRC itself recognises that pensions have increasingly been used as a way of transferring wealth rather than solely funding retirement — one of the reasons given for the reform. (HMRC: pensions technical note)

From April 2027, the distinction becomes smaller.

That doesn’t suddenly make pensions less valuable. They remain an important and tax-efficient way to save for retirement.

What changes is one assumption:

leaving your pension untouched may no longer automatically be the most tax-efficient way to pass wealth on.

For some families, the existing strategy will remain perfectly sensible. Others may find there’s now a better balance between drawing from pensions, using other assets and supporting family during their lifetime.

→ New Tax Year, New Opportunities: What You Should Know About Your Pension

Who could be most affected by the 2027 pension changes?

The reform is likely to have the biggest impact where pension wealth pushes an estate closer to, or further above, IHT thresholds. A review can be particularly useful if you hold a significant defined contribution pension or have deliberately preserved it for beneficiaries.

Not everyone will suddenly have an IHT problem.

The standard nil-rate band remains at £325,000, and a qualifying estate may also benefit from the residence nil-rate band of up to £175,000. The availability of these allowances depends on individual circumstances. (HMRC: Inheritance Tax thresholds)

The residence nil-rate band also starts to taper for estates worth more than £2 million. (HMRC: residence nil-rate band)

That means adding a substantial pension to the estate can sometimes have a wider impact.

Consider a simplified example:

This isn’t an IHT calculation, and real estates require far more detail. It simply shows why the pension can’t be considered on its own.

From April 2027, bringing that £700,000 pension into the picture could materially change the size of the estate and potentially affect the availability of other allowances.

It may be particularly useful to review your position if:

• you have a substantial defined contribution pension
• your estate is already approaching IHT thresholds
• you’ve deliberately avoided drawing from pensions to preserve them for beneficiaries
• your estate plan was written several years ago
• pensions represent a large part of what you expect children or other beneficiaries to inherit
• your beneficiary nominations haven’t been reviewed recently
• your family or financial circumstances have changed

None of these necessarily means something is wrong.

They’re simply good reasons to check that the plan still fits.

Should you start spending more of your pension before 2027?

Not automatically. Drawing more from your pension may suit some retirement plans, but it can create Income Tax consequences and reduce the money available for later life. The right decision depends on the role each part of your wealth plays.

Tax changes naturally create a sense of urgency.

You read that pensions are going to fall within IHT and the immediate thought may be:

“Should I start taking the money out?”

It’s understandable. But this is exactly where a little patience helps.

Withdrawing money from a pension doesn’t automatically remove it from your estate. If you take £100,000 out and simply leave it sitting in a bank account, you’ve changed where the money is held rather than necessarily improving the IHT position.

You may also create an Income Tax liability when taking pension income.

Most importantly, the pension still has its original job to do: support you through retirement.

A more useful conversation looks at all your assets together:

• pension income
• ISA withdrawals
• taxable investments
• cash
• property income
• gifting
• charitable giving

Then you can decide which combination gives you the lifestyle, flexibility and security you need.

For one person, drawing more pension income might make sense.

For someone else, their current strategy may still be the strongest option.

The answer needs to start with your life rather than the tax rule.

→ How to make good financial decisions – even under pressure

Could taking money from your pension reduce a future IHT bill?

Potentially — but what you do with the money afterwards matters.

Imagine you withdraw pension money and use it to fund more of your normal retirement spending.

Over time, that could reduce the value remaining in your estate while allowing you to enjoy more of the wealth you’ve built.

Alternatively, you may decide you’d like to help family sooner.

Perhaps that means contributing towards a house deposit, helping grandchildren with education, or simply giving children more financial breathing room at a stage of life when it can make a meaningful difference.

These decisions have very different consequences.

That’s why the focus should stay on purpose first, tax second.

You’re deciding how your wealth supports your life and your family. The tax treatment helps shape that decision, but it shouldn’t make it for you.

Should the 2027 pension changes make you think differently about gifting?

They might. Lifetime gifting could become more relevant for some families, but only where you can comfortably afford to give money away without putting your own future security at risk.

The new rules may lead some people to reconsider when they pass wealth on.

There are already several IHT exemptions that can support lifetime gifting.

For example, you can normally use an annual exemption of £3,000, while many larger outright gifts can fall outside the estate if you survive for seven years after making them. (GOV.UK: Inheritance Tax and gifts)

There is also a useful exemption for normal expenditure out of income.

Regular gifts can potentially qualify where they form part of your normal spending, come from income and leave you with enough income to maintain your usual standard of living. (HMRC: normal expenditure out of income)

This might include regular financial support to children or grandchildren, depending on your circumstances.

But the tax opportunity shouldn’t overshadow the more important question:

Can you comfortably afford to give the money away?

A gift should leave you feeling secure, not exposed.

Cashflow modelling can be particularly helpful here. It allows you to look beyond the next few years and test what happens if you live longer than expected, markets fall, inflation remains higher or your later-life needs change.

That gives you a much firmer basis for deciding what you can afford to share.

→ Should you gift wealth while living or leave it in your will?

Could inherited pensions face both IHT and Income Tax after 2027?

Potentially. IHT and Income Tax remain separate regimes, and the final tax position can depend on the pension, the beneficiary and the age at which the pension holder dies.

This is one of the more complicated areas of the change.

The current Income Tax treatment of inherited pensions can depend on factors including whether the pension holder dies before or after age 75 and how the benefits are taken. (GOV.UK: tax on a private pension you inherit)

Those rules don’t disappear in 2027.

HMRC’s May 2026 technical note explains how Income Tax and IHT are intended to interact under the new regime, including provisions relating to pension benefits where IHT has already been paid. (HMRC: pensions technical note)

That can make broad rules of thumb particularly unhelpful.

“Always spend your pension first” is too simplistic.

So is “always leave your pension untouched”.

Your outcome can depend on:

• the size and type of pension
• the rest of your estate
• who inherits
• your age at death
• how pension benefits are taken
• whether IHT exemptions apply

This is one of the areas where individual advice can add real clarity.

What happens if your pension passes to your spouse or civil partner?

Married couples and civil partners may be in a different position because the existing spouse exemption can continue to apply where the relevant conditions are met. HMRC has confirmed that exempt beneficiaries remain recognised within the new pension rules. (HMRC: pensions technical note)

For some couples, that may mean there’s little or no immediate IHT to pay when the first person dies.

But there is still a longer-term question.

If pension wealth moves to the surviving partner, it can become part of the wider estate planning picture for the future.

So rather than thinking only about “What happens to my pension when I die?”, it can be more helpful to ask:

“What do we want our combined wealth to do over both of our lifetimes?”

That creates a much clearer view of the family’s overall position.

Should you update your pension beneficiaries before 2027?

It’s sensible to check them. That doesn’t mean changing beneficiaries for tax reasons; it means making sure your pensions still reflect the people you genuinely want to support.

Beneficiary nominations are easy to forget about.

You may have completed an expression-of-wish form when you started a pension years ago and never looked at it again.

Since then, life may have changed considerably.

Marriage. Divorce. New relationships. Children. Grandchildren. Bereavement.

MoneyHelper recommends checking what happens to your pension when you die and making sure your pension provider has appropriate beneficiary information. (MoneyHelper: what happens to my pension when I die?)

The 2027 changes offer a useful moment to do that housekeeping.

For each pension, check:

• the current value
• who you’ve nominated
• whether those details are current
• how the pension is expected to be paid on death
• whether your nominations still fit with your will and wider wishes

The aim is simple: fewer assumptions and greater clarity for the people left to deal with everything later.

What information should you gather before reviewing your estate plan?

TL;DR: Start by getting a complete picture. Pension values are only one part of the story, so bring together your property, investments, savings, income needs, gifts and existing estate documents.

You don’t need to arrive at a planning conversation knowing exactly what you want to change.

That’s what the review is there to help you work out.

A useful starting point is gathering:

Once all of this is visible in one place, the decisions usually become much easier to understand.

What could a pension review look like in real life?

David and Helen are both in their late 60s.

They own their home, have ISAs and cash reserves, and have built up a sizeable defined contribution pension over their working lives.

Their retirement strategy was originally straightforward: use ISAs and savings for additional spending first, leave their pension invested for as long as possible, and eventually pass the pension on to their children.

Under the rules when they made that plan, there was a clear logic behind it.

The 2027 reform gives them a reason to revisit it.

They don’t need to scrap their current plans and start again.

Instead, their review might explore:

• whether drawing slightly more pension income would now make sense
• whether they still want to spend their ISAs first
• whether they feel comfortable starting some lifetime gifting
• whether regular gifts from surplus income could help their children now
• whether their wills still reflect their wishes
• whether pension beneficiary nominations are up to date
• what happens financially after the first death
• whether Helen or David would still be secure if either lived into their 90s

The goal isn’t to engineer the smallest tax bill imaginable.

For David and Helen, a good outcome means enjoying their retirement, staying financially secure and having the freedom to help their children where it feels right.

Tax efficiency supports that plan. It doesn’t define it.

Why is it worth avoiding tax-led decisions?

Tax matters.

Nobody wants to pay more than they reasonably need to.

But good financial planning has a much wider job to do.

Your pension may need to support decades of retirement. It may give you confidence to travel, reduce working hours, help family or absorb an unexpected cost.

Giving up some of that flexibility purely because the IHT rules are changing can create a different kind of risk.

There’s also a very human tendency to react strongly to the idea of losing money to tax. Once we focus on a potential tax bill, reducing it can start to feel like the goal in itself.

That’s when perspective helps.

A successful retirement plan should ultimately give you:

• security
• independence
• flexibility
• the ability to enjoy the money you’ve built
• confidence to support family where appropriate

Sometimes the most tax-efficient approach will achieve those things.

Sometimes a slightly higher eventual tax bill may sit alongside a much better life.

Your plan needs room for both the numbers and the person behind them.

→ The psychology of inheritance: why money conversations fail inside families

What should you review before April 2027?

You don’t need to make immediate changes. Use the time before April 2027 to understand your pension, wider estate and retirement needs, then decide whether anything genuinely deserves adjusting.

A sensible review starts with information rather than action.

Your pension and estate planning checklist

• Find all your pensions. Record their approximate current values and scheme types.
• Check your beneficiary nominations. Make sure they still represent your wishes.
• Estimate your wider estate. Include property, cash, investments and relevant liabilities.
• Read your will again. Check that it still reflects your circumstances and intentions.
• Review your retirement spending. Understand what you may need before deciding what you can give away.
• Gather details of previous gifts. Good records can make life much easier later.
• Model different scenarios. Compare keeping, drawing, spending and gifting pension wealth.
• Think about both partners if you’re a couple. The position after the second death can be very different.
• Talk to your family where it feels appropriate. They don’t necessarily need every number, but clarity around your intentions can help.
• Ask for advice where the picture is complicated. Pension, Income Tax and IHT rules can interact in ways that aren’t immediately obvious.

The new rules apply from 6 April 2027.

There is still time to approach this carefully.

A change in the rules doesn’t mean you need to change everything

The pension reforms are important.

For some families, they’ll change how pension wealth fits into an estate plan quite significantly. For others, the effect will be much smaller.

Either outcome is useful to know.

You may decide to enjoy more of your pension during retirement. You may feel ready to help family earlier. Or you may review everything and find that your current strategy still feels exactly right.

That certainty has value.

You’ve spent years building your financial position. A change in tax policy shouldn’t take away the confidence that comes with it.

Talk to Finura

At Finura, we look at your pension as part of a much bigger picture.

Your retirement. Your family. The life you want to enjoy. The people you’d eventually like to support.

If you’d like some clarity around what the reforms mean for you, we’re here to help.

Frequently asked questions

Will pensions be subject to Inheritance Tax from 2027?

Most unused pension funds and pension death benefits will be included within the estate for IHT where the pension holder dies on or after 6 April 2027. Some exclusions and existing exemptions will continue to apply. (HMRC: pensions technical note)

Should I withdraw my pension before April 2027?

Not simply because the rules are changing. Pension withdrawals may create Income Tax liabilities, and money taken out of the pension could remain within your estate elsewhere. It’s worth looking at your overall retirement needs before changing how you draw income.

Will my spouse or civil partner pay IHT on my pension?

Existing spouse and civil partner exemptions can continue to apply where the relevant conditions are met. However, couples may still want to consider what eventually happens to their combined estate after the second death.

Could beneficiaries pay both IHT and Income Tax on inherited pensions?

Potentially, depending on the circumstances. The two taxes work separately, and factors such as age at death and how benefits are paid can affect the final position. HMRC has introduced rules to address how the two regimes interact. (GOV.UK: inherited pensions)

Should I start gifting more before 2027?

Perhaps, but only if it suits your wider financial plan. Before giving money away, it’s important to feel confident that you have enough for your own retirement, unexpected costs and later-life needs.

Should I update my pension beneficiary nominations?

It’s worth checking them. Make sure each pension provider has current information and that the people named still reflect your wishes. (MoneyHelper: pensions after death)

Does the change apply if someone dies before 6 April 2027?

No. The new rules apply to deaths on or after 6 April 2027.

Sources and further reading

• HMRC — Inheritance Tax on pensions: technical note, May 2026
• HMRC — Inheritance Tax: unused pension funds and death benefits
• HMRC — Current IHT treatment of pension death benefits
• GOV.UK — Tax on a private pension you inherit
• MoneyHelper — What happens to my pension when I die?
• MoneyHelper — A guide to Inheritance Tax
  
• GOV.UK — Inheritance Tax and lifetime gifts
• HMRC — Normal expenditure out of income exemption
  
• HMRC — Inheritance Tax thresholds
  
• HMRC — Residence nil-rate band guidance

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Date written: 11/08/2026