Quick Summary: Pension Inheritance Tax 2027
- Under proposals announced in the Autumn Budget 2024, unspent defined contribution pension pots are expected to be included in your estate for inheritance tax (IHT) from 6 April 2027, subject to final legislation.
- Under the proposed rules, the standard IHT rate of 40% would apply to pension funds above your nil-rate band allowances.
- Pension types expected to be in scope include SIPPs, personal pensions, and workplace defined contribution schemes.
- Death benefits paid to a spouse or civil partner are expected to remain exempt from IHT.
- Key planning strategies to consider include phased drawdown, gifting from income, and reviewing beneficiary nominations.
- The planning window before April 2027 is open now: taking action early is important for larger estates.
Pension inheritance tax 2027 is a topic every pension holder in the UK needs to understand now. For decades, leaving your pension untouched was one of the most powerful ways to pass wealth to the next generation free of inheritance tax. Under proposals announced in the Autumn Budget 2024, that is set to change on 6 April 2027.
Under these proposals, unspent defined contribution pension funds would be brought inside your estate for inheritance tax purposes for the first time. The strategy that millions of retirees have built their legacy planning around, spending ISAs and savings first while preserving the pension as an IHT-free pot, would no longer work in the same way.
This article explains what the pension inheritance tax 2027 proposals mean, how the numbers could work in practice, which pension types are expected to be affected, and the planning steps you can consider now in the window before April 2027.
Important: These Are Proposals, Not Yet Final Law
The pension inheritance tax changes discussed in this article are based on proposals announced by the Government and draft legislation published to date. Final legislation and HMRC guidance may alter aspects of the rules before implementation on 6 April 2027. Always check the latest HMRC guidance or speak with a regulated financial adviser before taking any action.
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From April 2027, your unspent pension pot could become subject to 40% inheritance tax for the first time. Is your estate plan ready? #PensionPlanning #InheritanceTax #UKFinance
𝕏 Share this on XUnder current rules, defined contribution pension funds sit outside your estate for inheritance tax. When you die, the pension passes to your nominated beneficiaries according to the scheme’s discretion. Because the money legally belongs to the pension scheme rather than to you personally, HMRC cannot charge IHT on it.
Under proposals announced in the October 2024 Autumn Budget, that is expected to change. The Government has proposed that unused defined contribution pension funds and most lump-sum death benefits from registered pension schemes would be included in the estate for inheritance tax calculations from 6 April 2027.
Under the proposed rules, the standard 40% IHT rate would apply to the combined estate value above the nil-rate band, in the same way it applies to property, savings, and investments.
Key Proposed Date
Under current proposals, the pension inheritance tax change would apply to deaths on or after 6 April 2027, regardless of when the pension was originally set up. This date and the surrounding rules are subject to final legislation.
Which Pensions Are Expected to Be Affected?
Not every pension type is expected to be caught by the April 2027 proposals. The table below sets out which are currently expected to be in scope and which are expected to remain outside the estate, based on the draft legislation published to date.
| Pension Type | Position Under Current Proposals |
|---|---|
| Personal pension (SIPP, uncrystallised) | Expected to be included in estate |
| Workplace defined contribution scheme (unspent) | Expected to be included in estate |
| Unused drawdown funds (money not yet withdrawn) | Expected to be included under current proposals |
| Death in service lump sum benefits | Currently expected to remain outside the estate |
| Dependant’s scheme pension | Currently expected to remain outside the estate |
| Annuity payments (no remaining capital value) | Currently expected to remain outside the estate |
| Assets passed to spouse or civil partner | Currently expected to remain exempt (spousal exemption) |
| Charity lump sum death benefits | Currently expected to remain outside the estate |
The proposed changes primarily affect defined contribution pension wealth and lump-sum death benefits. Defined benefit (final salary) pension schemes operate differently and are generally not expected to be affected in the same way, because there is typically no individual fund remaining at death in a defined benefit arrangement.
How the Numbers Could Work: A Practical Example
To understand the potential impact of the pension inheritance tax 2027 proposals, here is a simplified worked example based on the rules as currently proposed.
Consider someone who dies in May 2027 with the following estate:
– Property: £400,000
– ISA and savings: £100,000
– Unspent SIPP: £300,000
– Total estate: £800,000
– Nil-rate band allowance: £325,000
– Residence nil-rate band (passing to direct descendants): £175,000
– Combined allowances: £500,000
Note: The residence nil-rate band is only available when a qualifying residential property is passed to direct descendants and may be reduced for larger estates above the £2 million taper threshold.
| Scenario | Taxable Estate Calculation | Potential IHT Bill |
|---|---|---|
| Under current rules (pension outside estate) | £800,000 minus £300,000 pension minus £500,000 allowances = £0 taxable | £0 |
| Under proposed rules from April 2027 (pension inside estate) | £800,000 minus £500,000 allowances = £300,000 at 40% | £120,000 |
The pension that was intended to pass tax-free to children could now contribute to a six-figure inheritance tax liability. For larger pension pots, the numbers become even more significant.
Example Is Simplified
This example is simplified and assumes full availability of both the nil-rate band and residence nil-rate band. Actual inheritance tax calculations can be affected by lifetime gifts, trusts, transferable allowances from a deceased spouse, downsizing provisions, and other estate planning factors. Always work through your own position with a regulated financial adviser.
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A £300,000 SIPP could create a £120,000 inheritance tax bill under proposals coming in April 2027. Here is what you can do before the deadline. #PensionIHT #RetirementPlanning #SIPP
𝕏 Share this on XThe Double Taxation Question
One of the most important concerns about the April 2027 pension inheritance tax proposals is the risk of double taxation. When beneficiaries inherit a pension and eventually draw it down, they would also pay income tax on the withdrawals at their marginal rate.
The Government has indicated it plans to introduce a credit mechanism so that the IHT already paid reduces the income tax liability on the same funds. However, the final design of this credit mechanism had not been confirmed at the time of writing, meaning the eventual interaction between inheritance tax and beneficiary income tax could differ from current proposals. Monitor HMRC guidance as April 2027 approaches, or work with a regulated financial adviser who is tracking the final legislation.
Credit Mechanism Not Yet Confirmed
The final design of the credit mechanism intended to offset double taxation had not been confirmed at the time of writing. The eventual interaction between inheritance tax and beneficiary income tax could differ from current proposals. Check HMRC’s published regulations as April 2027 approaches for the confirmed position.
Planning Steps to Consider Before April 2027
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You have a planning window before April 2027. Phased drawdown, gifting from income, and reviewing your beneficiary nominations could all make a significant difference. #PensionPlanning #IHT2027
𝕏 Share this on XA planning window is open right now. Here are the main strategies being discussed ahead of the proposed pension inheritance tax 2027 changes. Given the legislative position, any action should be considered in light of your individual circumstances and taken with regulated advice.
Strategy 1: Phased Drawdown
Rather than leaving your pension untouched, you could draw down from it gradually each year and keep withdrawals within tax-efficient income bands. If your total income stays below the higher rate threshold (£50,270 for 2025/26), you pay only 20% income tax on withdrawals. Taking modest amounts each year and gifting or spending the proceeds reduces the pension pot that might otherwise be subject to IHT on death.
This connects directly to the partial crystallisation strategy. You can take your 25% tax-free element in stages while managing income tax on the remaining drawdown.
Strategy 2: Gifting from Drawdown Income
If you draw pension income and then gift it away, you may be able to use the normal expenditure out of income IHT exemption. This allows regular gifts made from surplus income to fall outside the estate immediately, without waiting seven years. The gifts must be regular, made from income rather than capital, and leave you with enough to maintain your usual standard of living.
The annual gift allowance (£3,000 per year) and potentially exempt transfers (PETs, which become IHT-free after seven years) are additional routes for gradually reducing your estate over time.
Strategy 3: Reviewing Beneficiary Nominations
Your pension does not pass through your will. It passes according to the expression of wishes or nomination form held by your pension provider. It is worth reviewing these nominations now.
If you want to route the pension to a spouse or civil partner (whose receipt remains expected to be IHT-exempt under the proposals) rather than directly to children, updating your nomination could make a significant difference to the overall tax outcome. Many people completed these forms decades ago and have never revisited them. Ensure your scheme holds an up-to-date nomination on file.
Strategy 4: Spousal Planning
Transfers of assets between spouses and civil partners are expected to remain IHT-exempt under the proposed rules. If the estate is large and the surviving spouse does not need the pension income immediately, routing the pension to a spouse could defer the IHT event and provide more time for further planning.
It is important to note that the pension may still form part of the surviving spouse’s estate in the future if it remains unspent at the time of their death. This strategy works best when the surviving spouse has their own planning flexibility and a lower overall estate value.
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Passing your pension to a spouse may defer inheritance tax, but it does not eliminate it. The pot could still be taxed when your spouse dies. #PensionTax #EstatePlanning #UKPensions
𝕏 Share this on XStrategy 5: Charitable Giving
Leaving 10% or more of your net estate to a registered charity reduces the IHT rate on the remainder from 40% to 36%. If your estate would be IHT-liable under the proposed rules because of the pension inclusion, this can produce a meaningful saving while also supporting a cause you care about.
A Note on Regulated Advice
The strategies above are for educational purposes only. Pension inheritance tax planning is complex and the legislation is still being finalised. Before making any changes to your pension, beneficiary nominations, or gifting strategy, speak with an FCA-regulated financial adviser who specialises in retirement and estate planning.
What Stays the Same
It is worth being clear about what is not expected to change in April 2027. The 25% tax-free cash entitlement (up to the £268,275 lump sum allowance) remains intact under current rules. The treatment of pension withdrawals for income tax during your lifetime does not change under the proposals. Pensions are still highly tax-efficient vehicles for accumulation: you still receive income tax relief on contributions, and growth inside the pension remains free of capital gains tax and income tax during your lifetime.
The April 2027 proposals affect the estate planning dimension of pensions specifically, not their role as a savings or income vehicle.
How This Connects to the Rest of Your Pension Planning
The pension inheritance tax 2027 proposals do not sit in isolation. They interact with several other pension rules covered in this series:
Understanding crystallised and uncrystallised pension funds is important for knowing which pension assets would be in scope on death.
The money purchase annual allowance (MPAA) affects how much you can contribute back into a pension if you draw down funds to reduce an IHT-liable pot while still working.
Pension carry forward rules may allow larger top-up contributions in years where you have unused allowance, if the estate planning picture changes in your favour.
The pension annual allowance sets the maximum you can contribute in any tax year and receive tax relief, which forms the upper boundary of any top-up strategy.
Key Takeaways
1. Under current proposals, unused defined contribution pensions are expected to be included in your estate for inheritance tax from 6 April 2027, subject to final legislation.
2. The change is expected to affect SIPPs, personal pensions, and workplace DC schemes in drawdown or uncrystallised form.
3. Defined benefit (final salary) schemes are generally not expected to be affected in the same way.
4. Spouses and civil partners are expected to remain exempt. Death-in-service benefits, dependant’s scheme pensions, and annuities are currently expected to remain outside the estate.
5. A double taxation credit mechanism is proposed, but its final design had not been confirmed at the time of writing.
6. Planning strategies to consider include phased drawdown, gifting from income, reviewing beneficiary nominations, spousal routing, and charitable giving.
7. Consult a regulated financial adviser before acting. The legislation is still being finalised and personal circumstances vary significantly.
Frequently Asked Questions: Pension Inheritance Tax 2027
Q: Will my pension definitely be subject to inheritance tax from April 2027?
Under proposals announced in the Autumn Budget 2024, unused defined contribution pension funds are expected to be included in your estate for inheritance tax from 6 April 2027. However, the legislation has not yet been finalised. The rules as implemented may differ from the current proposals, so it is important to monitor HMRC guidance and seek regulated advice before making any planning decisions.
Q: Does the pension inheritance tax change affect defined benefit pensions?
The proposals primarily target defined contribution pension wealth, such as SIPPs and workplace DC schemes. Defined benefit (final salary) pensions operate differently: when you die, there is typically no individual fund remaining, so the new rules are generally not expected to apply in the same way. If you hold a defined benefit pension and are concerned about your estate, speak with a financial adviser for guidance specific to your scheme.
Q: What happens to my pension if I leave it to my spouse?
Under the proposed rules, transfers of pension assets between spouses and civil partners are expected to remain exempt from inheritance tax, in line with the existing spousal exemption. However, if the pension passes to a surviving spouse and remains unspent at the time of their death, it may then form part of their estate and be subject to IHT at that point. Spousal planning can be a useful strategy, but it defers rather than eliminates the potential tax exposure.
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"The 25% tax-free cash entitlement is NOT affected by the April 2027 pension inheritance tax proposals. Your lifetime withdrawals remain unchanged. #PensionTaxFree #UKPensions"
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