Inheritance Tax on UK Pensions: What’s Changing and What You Need to Know
From April 2027, unused UK pensions will no longer be shielded from inheritance tax—marking a major shift in estate planning that could significantly impact how and when you draw your retirement savings.
The UK government has confirmed that, from April 2027, most unused pensions will be brought into scope for inheritance tax (IHT). This marks a significant shift in pension planning and could have major implications for your long-term financial strategy—particularly if you’re relying on leaving your pension to loved ones.
Who Will Be Affected?
Whether this affects you depends on a few factors: the value of your pension when you die, your total estate, and who you intend to leave your pension to.
The government estimates around 8% of estates will be impacted. While that might seem like a relatively small proportion, the true number could be higher. Many individuals are expected to alter how and when they access their pensions during their lifetime to minimise the future tax impact.
What Types of Pensions Are Affected?
Most unused pensions and death benefits will be included in the value of an estate for IHT purposes from April 2027. However, this doesn’t automatically mean tax will be due.
Exemptions include:
• Dependants’ pensions from defined benefit (final salary) schemes
• Survivors’ pensions paid under an annuity
• Eligible lump sums paid to charities
• Death-in-service lump sums (if the deceased was still employed)
Inheritance Tax Allowances and Exemptions
The most significant exemption is the spousal exemption—any pension left to a spouse or civil partner is free from inheritance tax.
If you’re leaving your pension to someone else, IHT only applies if the total value of your estate exceeds the nil rate band and any additional allowances:
• Standard nil rate band: £325,000 (frozen until at least 2030)
• Residence nil rate band: up to £175,000 (if passing on a home to direct descendants; tapered above £2m estates)
• Combined allowance for couples: Up to £1 million, if structured correctly
• IHT rate: 40% on the value above the threshold
Who Pays the Inheritance Tax?
One change from the original proposals is that the responsibility for paying the tax lies with the personal representatives of the estate, just like with other assets. That could create complications if the pension beneficiaries are different from the heirs of the rest of the estate.
In some cases, the pension scheme provider may pay the IHT directly, but only if the tax due on the pension is more than £4,000 and certain conditions are met.
Will Beneficiaries Also Pay Income Tax?
Yes—under current rules, if the pension holder dies aged 75 or over, beneficiaries must pay income tax at their marginal rate on any withdrawals. No income tax is due if the pension holder dies before age 75.
With IHT now also potentially applying to unused pensions, this could result in very high effective tax rates on money passed down via pensions—potentially both IHT and income tax.
What Can You Do Now?
These changes don’t take effect until 6 April 2027, so there is still time to plan. In the meantime:
• Review your pension nominations regularly—just as you would your will.
• Consider changing your beneficiaries. For example, you might name someone other than your spouse or civil partner as a pension beneficiary now (while it remains IHT-free), and switch it back closer to 2027 to take advantage of the spousal exemption.
• Understand your exposure: If your estate is close to or over the IHT threshold, early planning is essential.
Should You Take Money Out of Your Pension?
One likely outcome of these changes is that more people will begin accessing their pensions earlier—perhaps spending more on themselves or gifting assets during their lifetime.
Traditionally, many have treated pensions as the last pot to touch, due to their IHT advantages. But with that benefit set to disappear, ISAs or other assets may be prioritised for long-term growth instead.
If you’re over age 75, this is particularly relevant. Any unused tax-free cash could lose its status, and both IHT and income tax may apply to what’s left in your pension.
Taking an income now, or gifting it to others, may result in less tax overall—and allows you to see your loved ones benefit sooner.
Planning Ahead
While the upcoming changes might feel like a setback, they also represent an opportunity to review your estate planning, optimise how and when you draw income, and ensure your pensions are structured efficiently.
If you’d like tailored advice on how this change could affect your retirement and legacy planning, please get in touch with us at Proctor Wealth Associates.
Will is an Independent Financial Adviser with over a decade of experience helping expats make the most of their international status.