For as long as most of us have been paying into a pension, there has been one quietly brilliant fact sitting underneath the whole system: whatever was left in your pot when you died did not count as part of your estate. No inheritance tax. It sat there, untouched by the taxman, as if it belonged to a different, more polite branch of the law entirely.
From April 2027, that stops being true.
This is not a reason to panic, and it is certainly not a reason to do anything drastic with your pension this afternoon. But it is a reason to understand what is changing, because a good number of the decisions people make about their pension in the years before they die (how much to draw, what to leave untouched, who gets what) were made on the assumption that this rule would carry on forever. It won’t. So let’s get into what is actually happening, who it affects, and what, if anything, you should do about it.
What’s actually changing
Under the current rules, most defined contribution pension pots sit outside your estate for inheritance tax purposes. If you die before 75, your beneficiaries can usually inherit what’s left completely tax free. If you die after 75, they pay income tax on withdrawals at their own rate, but there’s no inheritance tax on top. This quirk has made pensions one of the most efficient ways to pass on wealth in Britain, and a lot of people who could comfortably afford to spend their pension have instead been living off other savings and leaving the pension for exactly this reason.
From 6 April 2027, unused pension funds and death benefits will be brought into the value of your estate for inheritance tax purposes, a change first confirmed by the government in the Autumn Budget. In practice, that means your pension pot gets added to everything else you own (your house, your savings, your investments) when working out whether your estate crosses the inheritance tax threshold, and how much tax is due if it does.
It’s worth being precise about what this doesn’t do. It doesn’t turn your pension into something that gets taxed twice, once on the way in and again on the way out. It doesn’t apply retrospectively to money already withdrawn. And it doesn’t change the income tax treatment for beneficiaries who inherit after you turn 75, which remains a separate layer on top. What it does is close the loophole that let pensions sit outside the estate altogether.
Who this actually affects
Here’s where a lot of the coverage online goes wrong. Type “pension inheritance tax 2027” into Google and you’ll find plenty of advice firms doing their best impression of a smoke alarm with a low battery. The truth is calmer than that.
This change matters most if your estate, pension included, is likely to sit above the nil rate band (£325,000) or the combined threshold with the residence nil rate band (up to £500,000 if you’re leaving a home to direct descendants, more again if a spouse’s allowance is added on). If your total estate is comfortably below that, the change is largely academic. You were never going to pay inheritance tax anyway, and you still aren’t.
It matters more if you’ve been deliberately using your pension as an inheritance tax shelter: living off ISAs and other savings in retirement while leaving the pension pot as untouched as possible, on the theory that it would pass to your children tax free. That strategy, which has been genuinely sound advice for years, needs revisiting. Not abandoning necessarily, but revisiting.
It matters less if most of your pension is a defined benefit scheme (a final salary pension, in old money), since these typically don’t have a pot that can be passed on in the same way and are largely unaffected.
What doesn’t change
A few things stay exactly as they are, and they’re worth knowing so you don’t end up more worried than the situation warrants.
Transfers between spouses and civil partners remain exempt, on death as in life. If you leave everything to your husband, wife, or civil partner, inheritance tax still isn’t the issue. Death-in-service benefits, where applicable, are typically unaffected. And the basic mechanics of drawdown itself (how you take an income, when you can access your pot, the 25% tax free lump sum) carry on exactly as before. This change affects what happens to what’s left when you die, not how you use your pension while you’re alive.
What you can actually do about it
This is the part that matters, and it’s worth resisting the urge to do something dramatic before you’ve thought it through properly.
Reconsider the order you spend things in. If you’ve been drawing from ISAs first and leaving the pension for last, purely for inheritance tax reasons, that logic has weakened. It may now make more sense to draw from the pension a little sooner and let the ISA, which was never outside your estate anyway, do relatively more of the heavy lifting for your own spending. This is one to think through with your own numbers rather than copy from a blog post, but it’s the single biggest strategic shift worth considering.
Look at gifting, carefully. The seven year rule, whereby gifts made more than seven years before death fall outside your estate entirely, hasn’t changed. If you’re in a position to gift money during your lifetime rather than leaving it all to be inherited, that remains one of the most effective tools available, and it now applies to money you might previously have left sitting in a pension. This is not a decision to rush, and if you’re gifting meaningful sums it is worth getting proper advice rather than working from a rule of thumb.
Update your will and expression of wishes. This sounds dull, and it is, but an out of date expression of wishes form is one of the most common and entirely avoidable mistakes people make with pensions. If your circumstances have changed since you last filled one in, this is a sensible moment to update it, regardless of the tax changes.
Talk to someone if your estate is anywhere near the threshold. This is one of the few areas where DIY planning has real limits. If your total estate, including your pension, is close to or above the nil rate bands, the interaction between your pension, your will, your gifting and your spouse’s own estate is genuinely complicated enough to warrant a conversation with a proper adviser. This isn’t a sales pitch dressed up as caution. It’s just true.
A worked example
Numbers make this easier to picture than percentages, so here’s a simple one.
Imagine an estate worth £600,000 in total: a house worth £350,000, savings and investments worth £50,000, and a pension pot worth £200,000. Under the old rules, the pension sits outside the estate entirely. The taxable estate is £400,000, which after the £325,000 nil rate band (assuming no residence nil rate band applies here) leaves £75,000 taxable at 40%, an inheritance tax bill of £30,000.
Under the 2027 rules, the pension is included. The taxable estate becomes £600,000. After the same £325,000 nil rate band, £275,000 is taxable at 40%, a bill of £110,000.
That’s an £80,000 difference, on a fairly ordinary estate, purely from a change in what gets counted rather than a change in what’s owned. It’s a useful example precisely because there’s nothing exotic about it. No offshore trusts, no complicated family structure. Just a house, some savings, and a pension, which describes an enormous number of people approaching retirement in Britain right now.
Where this leaves you
None of this is a reason to spend your pension pot faster than you’d otherwise like, purely to avoid a tax bill your family won’t pay until long after you’re not around to worry about it. But it is a good reason to make sure the plan you built five or ten years ago still makes sense under the rules you’ll actually be living, and dying, under.
If you haven’t already, this is exactly the kind of thing worth folding into a one page annual review, an idea we set out in full in our book, Simple Investing For Retirement. It doesn’t need to take over your life. It just needs to happen once a year, with the current rules in front of you rather than the rules that applied when you first drew up the plan.
And if you’re still working out how to structure withdrawals in the first place, our piece on the bucket strategy is a good place to start. For the fuller picture of the drawdown years, our pillar guide, How to Make Your Pension Last, covers everything from the 4% rule to care costs and lasting powers of attorney.
A note on what this is and isn’t. This article is general information about UK pensions and inheritance tax, not personalised financial or tax advice. Pension and tax rules can and do change, and the figures used here are illustrative rather than a calculation of your own position. If your estate is anywhere near the thresholds discussed, or your circumstances are more complex than the example given, please speak to a regulated financial adviser before acting.