A major change is coming to UK inheritance tax — and it directly affects anyone with a pension. From April 2027, unused pension funds and death benefits will be included in your estate for inheritance tax (IHT) purposes for the first time.
This isn't just a concern for people close to retirement. If you're building a pension now, or if you might one day inherit one, this change could affect you.
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What is inheritance tax?
Inheritance tax (IHT) is currently charged at 40% on estates worth more than £325,000 — the nil-rate band. The tax only applies to the amount above the threshold, not the total estate value.
If you leave your home to children or grandchildren, your threshold can rise to £500,000 thanks to the residence nil-rate band.
| Item | Amount |
|---|---|
| Estate value | £600,000 |
| Nil-rate band | £325,000 |
| Taxable amount | £275,000 |
| IHT at 40% | £110,000 |
What's changing in April 2027?
Right now, unused pension savings and death benefits sit outside your estate — they are not subject to IHT. This has made pensions a popular way to pass wealth to loved ones tax-efficiently.
From April 2027, this changes. Unused pension funds and pension death benefits will be counted as part of your estate when calculating IHT.
If you've been saving for decades, your pension pot could be substantial — potentially pushing your total estate above the threshold and triggering a 40% tax charge on the excess.
This is one of the most significant changes to pension taxation in years. Estates that were previously below the IHT threshold may now exceed it once pension savings are included.
Why is the government making this change?
The 2015 pension freedoms reforms made pensions an increasingly attractive vehicle for passing wealth to the next generation — rather than funding retirement. The government's stated aim with this change is to encourage people to use their pensions to fund their retirement, rather than as a tax-efficient inheritance tool.
Will it affect me?
This change will affect you if the total value of your estate — including unused pension savings — exceeds your nil-rate band threshold.
Ask yourself:
- Is my estate (property, savings, investments) already close to £325,000?
- Do I have a significant pension pot I was planning to leave untouched?
- Could my pension pot push my estate above the threshold?
If the answer to any of these is yes, it's worth planning ahead now.
What can you do?
1. Consider spending more of your pension in retirement
If you were planning to leave your pension largely untouched, it may now make more sense to draw on it during your lifetime — funding the retirement lifestyle you want — rather than leaving it to be taxed at 40%.
2. Use salary sacrifice to maximise contributions now
The tax efficiency of pension contributions hasn't changed. Salary sacrifice still saves you income tax and National Insurance on every pound contributed. Building your pot efficiently now gives you more flexibility later.
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3. Gift while you're alive
One way to reduce your estate's value for IHT purposes is to gift assets during your lifetime. You can give away up to £3,000 per tax year free of IHT — the annual gifting exemption. Other exemptions also apply for wedding gifts, regular gifts from income, and more.
Gifts made more than 7 years before death are generally exempt from IHT. Gifts made within 7 years may still be included in your estate on a sliding scale — known as taper relief.
4. Review your beneficiary nominations
Your pension is not usually covered by your Will. Instead, pension providers let you nominate beneficiaries separately. It's important to:
- Check your nominations are up to date on all pension plans — current and old
- Update nominations after major life changes (marriage, divorce, children)
- Remember that even with clear nominations, pension benefits may still form part of your estate for IHT from April 2027
5. Consider speaking to a financial adviser
Estate planning with pensions is complex. A regulated financial adviser can help you model your IHT position, review your pension strategy, and identify the most tax-efficient approach for your circumstances.
MoneyHelper (moneyhelper.org.uk) is a free, impartial government-backed service that can help you find a regulated financial adviser.
Key thresholds to know
| Threshold | Amount |
|---|---|
| Standard nil-rate band | £325,000 |
| Residence nil-rate band (home to direct descendants) | £175,000 |
| Combined maximum (individual) | £500,000 |
| Combined maximum (married couple) | £1,000,000 |
| IHT rate on excess | 40% |
| Annual gifting exemption | £3,000/year |
What's not changing
Pensions remain one of the most tax-efficient ways to save for retirement. Salary sacrifice contributions still reduce your income tax and National Insurance. Employer contributions are still free of tax. The pension annual allowance (£60,000 for 2025/26) still applies.
The April 2027 change affects unused pension savings passed on at death — not the tax efficiency of contributing to a pension during your lifetime.
The government is still confirming the full technical details of how the 2027 change will work. It's worth keeping an eye on HMRC guidance as the implementation date approaches.
Summary
- From April 2027, unused pension funds count towards your estate for IHT
- IHT is charged at 40% on estates above £325,000
- Pensions were previously outside the estate — this is a significant change
- Consider drawing on your pension in retirement, gifting during your lifetime, and reviewing beneficiary nominations
- Salary sacrifice remains highly tax-efficient for building your pension pot
- Seek regulated financial advice for personalised estate planning
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This article is based on our understanding of proposed legislation as of March 2026 and should not be taken as financial or tax advice. Tax rules may change. Your personal circumstances, including where you live in the UK, will affect the tax you pay. Always consult a qualified financial adviser for advice tailored to your situation.