From April 2027, unused pension pots will be included in your taxable estate for inheritance tax. Millions of UK savers who thought their pension was IHT-free face a significant bill. Here is what changes and what to do now.
Currently, pension pots sit outside your estate for inheritance tax purposes. When you die with money remaining in a defined contribution pension, it passes to your chosen beneficiaries free of IHT — regardless of the size of your estate. This has made pensions one of the most tax-efficient assets to hold in retirement.
From 6 April 2027, this changes fundamentally. Unused pension funds and lump sum death benefits will be included in your taxable estate. If your total estate — including the pension — exceeds the nil rate band, IHT at 40% will apply to the excess.
The change catches people who may not currently consider themselves to have an IHT problem:
The nil rate band is £325,000 per person. Married couples can combine to £650,000. Add the residence nil rate band (up to £175,000 per person) for those leaving a home to direct descendants, and a couple can pass £1 million IHT-free — but only if the pension is currently excluded. From April 2027, the pension pot reduces the amount of other assets protected by these bands.
A married couple. House worth £450,000. Other savings £100,000. Pension pot £350,000 between them. Currently: estate of £550,000, below the £1m combined threshold including RNRB — no IHT.
From April 2027: add £350,000 pension. Total estate £900,000. Still below £1m threshold? It depends on how the RNRB is calculated with the pension included. Many couples in this position will tip above the threshold and face a bill of £40,000–100,000 that they hadn't anticipated.
Your pension provider doesn't have to follow your expression of wishes — they can use their discretion — but an up-to-date form pointing to the right beneficiaries reduces confusion and delay. Update yours now to reflect your current wishes under the new regime.
If you are in retirement and deliberately leaving your pension untouched, the calculation changes from April 2027. Drawing pension income (which is subject to income tax) may be preferable to leaving a pot that becomes subject to IHT at 40%. The optimal strategy depends on your income tax position — this requires personalised financial advice.
Your will may have been drafted with the assumption that the pension passes outside the estate. If you have a specific IHT reduction strategy built into your will — gifts, trusts, charitable bequests — you may need to revisit it in light of the pension now forming part of the estate.
The annual gift exemption (£3,000/year) and potentially exempt transfers (gifts that survive IHT if you live 7 years) become more valuable if your pension is going to push your estate above the threshold. Start gifting now — 7-year clocks start from the date of the gift.
Leaving 10% or more of your net estate to charity reduces the IHT rate from 40% to 36%. With a larger taxable estate from April 2027, the charitable bequest threshold calculation changes — worth reviewing with an adviser.
Review your will before April 2027. If you haven't made a will, make one now — the pension change makes it more important, not less. If your estate is likely to be above the IHT threshold including your pension from 2027, seek financial advice on drawdown strategy. Our Inheritance Tax Estimator tool can give you a rough sense of your exposure — use it free here.
DocPilot will publish an updated guide to the pension IHT changes when the implementing regulations are finalised and we have certainty on the transitional provisions. Sign up to our legal update emails to be notified.
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