For most of the last decade, pensions have been a fantastic store of wealth, in addition to funding retirement. The pension has sat outside the estate for inheritance tax, making it one of the most efficient assets to leave behind. From 6 April 2027 this comes to an end. Unused defined contribution pension wealth and most lump sum death benefits will be brought into the estate for IHT.

The rule change has been confirmed twice. It was first announced in the Autumn Budget on 30 October 2024, with a consultation that ran into early 2025. The government response and draft legislation followed on 21 July 2025, and the Autumn Budget on 26 November 2025 confirmed both the start date and the surrounding detail. The Finance Bill 2025-26 carries the legislation.

For many of our clients this will have a major impact.

What is changing

Today, the value of an unspent defined contribution pension does not count towards your estate when HMRC calculates inheritance tax. If you die before age 75, beneficiaries can typically take the money completely tax-free. If you die after 75, they pay income tax at their own rate as they draw from it, but there is still no IHT.

From 6 April 2027 most unused pension funds and pension death benefits will sit inside the estate. If the estate is above the available nil-rate bands, the excess will be charged at 40% IHT. The pension may still go to the named beneficiary, but the IHT bill will need to be paid first.

A few things stay the same. Anything passing to a surviving spouse or civil partner remains exempt from IHT. Gifts to a registered charity are also exempt. Death-in-service lump sums from registered pension schemes have been excluded after the consultation, so the cover provided by an employer scheme is not caught. The IHT nil-rate band stays at £325,000 and the residence nil-rate band at £175,000, both frozen until April 2031 following the November 2025 Budget.

Who is most affected

The households most exposed are the ones our practice was built around. A couple with a main home, ISAs, general investment accounts and pension pots that together comfortably exceed the available nil-rate bands. Where pensions have been taken sparingly, preferring to draw from IHT-affected investments like ISAs, the effect will be felt the most.

Where things really sting are households where the total estate value without pensions is below £2 million, but above £2 million when pensions are considered. For the “slice” of estate between £2 million and £2.7 million, the effective inheritance tax rate is 60%, because the “residence nil rate band” is tapered away.

Before age 75 the maths is straightforward – on death, the pensions are added to estate assets, charged against inheritance tax (40% over the nil-rate bands for most people), and then paid after tax to the nominated beneficiaries.

Over age 75, the maths is more complicated. In addition to the 40% IHT bill, whatever is left is taxed at the point a beneficiary draws it, at their highest income tax rate.

This can mean that a higher-rate or additional-rate taxpayer inheriting from a parent who died over the age of 75 is looking at a combined effective tax burden in the region of 60% or more on money withdrawn from the pension.

Another point of interest is that trustees and personal representatives have new responsibilities. They become primarily liable for reporting and paying any IHT due on pension funds. They can instruct scheme administrators to withhold up to half of the relevant benefits for fifteen months while affairs are settled. Historically, pension assets were paid quickly to beneficiaries – this no longer looks to be the case.

Considerations

1. Where income is taken from. In recent years we have encouraged clients to spend taxable wealth first, followed by ISAs, leaving the pension intact for as long as possible. After April 2027 this needs to be revisited household by household. For some, drawing more from the pension during life, paying the income tax along the way, and recycling what isn’t spent into ISAs or gifts will leave the estate in a better position. For others, holding the pension still makes sense, especially where one spouse is significantly older than the other or where charitable gifts will absorb the excess.
2. Gifting. The seven-year potentially exempt transfer regime is unchanged, and gifting remains one of the more powerful tools in the kit. Where pension drawdown can be used to fund regular gifts out of income, the “normal expenditure out of income” exemption is worth serious thought. It is a wide-ranging exemption, and underused by many.
3. The use of life insurance written into trust. This can sit alongside the estate and effectively help meet the IHT bill without itself adding to it.
4. Expressions of wish. Every defined contribution pension has one, and every household with material pension wealth should review theirs in the next twelve months. The rules around discretionary trusts and lump sums interact with the new IHT regime in ways that might catch poorly drafted nominations. Often a nomination to the spouse is the right answer, sometimes a bypass trust will be, sometimes individual nominations will be, and often charities will be the most tax-efficient nomination, if you were planning to give otherwise.
5. Charitable giving. Gifts to a registered charity remain fully IHT-exempt, and where charitable giving is already part of the planning picture, the post-2027 maths often makes pension wealth the most tax-efficient asset from which to make those gifts. Where 10% or more of the net estate is left to charity, the IHT rate on the remainder drops from 40% to 36%.

Finally, we should touch on what people probably shouldn’t be doing. It is probably not sensible to pull large lump sums out of pensions in 2026 because something is changing in 2027. Taking money from tax-efficient pensions, to sit in cash savings inside a taxable estate, potentially paying income tax in the process, likely makes things worse rather than better.

An important point here is that if you’re unlucky enough to die before the age of 75 it is still more tax-efficient to die with funds inside the pension, than having drawn those funds out and paid income tax.

What we are doing with clients

If you have had an annual planning meeting with us recently you will know this is top-of-mind. We are reviewing pension expressions of wish and modelling the impacts of changes. We have been reviewing the costs of life insurance where this meets client needs and objectives. We are also closely monitoring the relative benefits of different approaches. Some of our clients are very motivated to draw more funds out, and this can work as long as it’s part of a gifting or other tax-efficiency strategy.

If you don’t already work with us, or have family or friends who may be affected by these changes, please feel free to get in touch, or invite them to get in touch, and arrange a 20-minute initial discussion with a member of the team.

A final word, with our regulatory hat on. The rules above reflect the position confirmed in the Autumn Budget on 26 November 2025 and the draft legislation in Finance Bill 2025-26. Tax rules can and do change, and the right action for your household depends on your full picture. This article is general information, not personal advice. Investments and pensions can fall in value as well as rise, and you may not get back what you put in.