For many families, pensions have become a cornerstone of long-term wealth planning. Often built up quietly over decades, they have offered a tax-efficient way to provide for loved ones while bringing reassurance about the future.
That sense of certainty is now facing change. From the 6th of April 2027, reforms to Inheritance Tax rules are set to bring most unused pension funds and death benefits into scope. What may appear to be a technical adjustment could, in reality, push estates over the Inheritance Tax threshold and prompt a rethink for those who have carefully structured their retirement finances.
Understanding how these changes affect your estate, and what steps may be available, can make a significant difference. Jennifer Reid, Trainee Solicitor in our Wills, Trusts and Probate team at Jackson Lees, explains the legal and practical considerations so you can approach estate planning with clarity, confidence, and peace of mind.
What exactly is changing with pensions and Inheritance Tax in April 2027?
From the 6th of April 2027, the government plans to treat most unused pension funds and pension death benefits as part of the deceased person’s estate when calculating Inheritance Tax.
HMRC has also confirmed that personal representatives, such as executors or administrators, will be responsible for reporting and paying any tax due on those pension assets.
There are some important exceptions.
HMRC says that death in service benefits paid from a registered pension scheme will be excluded from these changes, and certain dependant’s pensions from defined benefit arrangements are also not intended to fall within the new rules.
Existing exemptions for assets passing to a spouse or civil partner or to charity remain part of the wider Inheritance Tax system.
Why could more families face Inheritance Tax under the new 2027 pension rules?
Inheritance Tax is usually charged at 40% on the value of an estate above the available tax-free thresholds.
Currently:
- The nil‑rate band is £325,000.
- An additional residence nil‑rate band of up to £175,000 may apply if a qualifying home passes to direct descendants.
These thresholds have been frozen for years and are due to stay frozen, which already means more estates are being caught as asset values rise.
Once pensions are added into the calculation, some estates that looked comfortably below the threshold may no longer be below it at all.
The change can also affect larger estates in another way.
The residence nil-rate band begins to taper once the estate exceeds £2 million, reducing by £1 for every £2 over that level. In practice, this means the allowance is completely lost when the estate reaches around £2.35 million for a single person, or £2.7 million for a married couple or civil partners where full allowances are available.
Including pension wealth could therefore increase exposure in two directions at once: by creating an Inheritance Tax charge where there was none before, or by reducing the extra allowance available on the family home.
Why have pensions been so important for estate planning until now?
Historically, many people have used other savings and investments first in retirement while leaving pension funds untouched for as long as possible.
That has often been a sensible strategy because, under the current framework, pensions can be passed on more tax-efficiently than many other assets.
HMRC has said the reform is intended to remove what it sees as a distortion in the system, where pensions have increasingly been used as a vehicle for passing on wealth rather than simply funding retirement.
That does not mean the old approach was wrong. It means:
- The tax landscape is changing.
- A strategy that worked well a few years ago may now need another look, particularly if a large proportion of your wealth sits in a defined contribution pension, such as a personal pension, workplace pension or SIPP.
Could pension savings be taxed twice after death?
In some cases, yes, that is a real concern.
If unused pension funds form part of the estate and the estate is above the available thresholds, there could be an Inheritance Tax charge on that value.
Then, depending on the type of pension, the timing of death and how benefits are taken, the beneficiary may also pay income tax when drawing money from the pension.
That can significantly reduce the amount ultimately received by the family.
The exact position will depend on the circumstances, so it is important not to assume the same tax treatment applies to every case.
Even so, the broader point is clear: pensions may no longer be the straightforward shelter from Inheritance Tax that many people have relied on in the past.
What should you be thinking about before the 2027 pension changes take effect?
1. Look at your estate as a whole
Avoid treating your pension in isolation. Consider:
- Property.
- Savings.
- Investments.
- Pension funds.
A combined view gives a clearer picture of your potential IHT exposure.
2. Review how you draw income in retirement
The traditional approach of preserving pensions may not always be the most effective.
You may want to consider
- Drawing pension income earlier.
- Balancing income tax considerations with future IHT exposure.
3. Check pension nominations
Make sure your pension death benefit nominations still align with your overall plans.
Questions to consider:
- Do they match your Will?
- Do they still reflect your intended beneficiaries?
4. Consider how assets pass on death
In some cases, structuring assets to pass to a spouse or civil partner first may:
- Help defer an IHT charge.
- Provide additional flexibility later.
5. Revisit lifetime planning options
These are not new, but may become more relevant:
- Making use of annual gifting allowances.
- Recording gifts from surplus income properly.
Do you need to act now ahead of the April 2027 pension reforms?
There is still time before the new rules take effect on 6 April 2027, but leaving things too late can limit your options.
For many people, the real value lies in understanding exactly where they stand now and taking informed, considered steps while there is flexibility to do so.
How can Jackson Lees help you prepare for the 2027 pension reforms?
At Jackson Lees, our Wills, Trusts and Probate team advise individuals and families specifically on the impact of the 2027 pension reforms and how they interact with wider estate planning. We take a joined up approach, looking at your Will, pension arrangements and wider financial position together, so that nothing is considered in isolation.
Whether your aim is to protect what you pass on, reduce potential tax exposure, or simply gain clarity about your position, a well timed review can make a meaningful difference. Even small adjustments, made early, can help preserve more for the people who matter most to you.
If you would like tailored advice on how the 2027 pension reforms could affect your estate, our team is here to help you plan with confidence. Please give us a call, request a callback or make an enquiry to see how we can help.