Pension Estate Planning UK 2027: How to Prepare for the Inheritance Tax Changes
From 6 April 2027, unspent defined contribution pension pots will be subject to inheritance tax for the first time. This changes decades of pension estate planning strategy. Here is what the change means and the six actions to take before the deadline.
Budget 2024 pension IHT change: in force from 6 April 2027
Announced 30 October 2024. From April 2027, the value of unspent DC pension funds will be added to the estate for IHT calculation. Spousal transfers remain exempt. Defined benefit pensions are unaffected. The pension scheme administrator will handle IHT reporting and payment before releasing funds to beneficiaries.
Before vs after April 2027
| Aspect | Before April 2027 | From April 2027 |
|---|---|---|
| DC pension pot at death | Outside estate — no IHT | Inside estate — IHT applies above NRB |
| Left to spouse/civil partner | IHT-free (outside estate) | IHT-free (spousal exemption applies) |
| Left to children | Income tax at marginal rate; no IHT | IHT applies; then income tax on drawdown |
| DB pension death benefit | No IHT (not a pot asset) | No change — still outside estate |
| Pension nominations | Important for who receives | Critical — also affects IHT reporting |
| Drawdown order strategy | Spend pension last (IHT-free) | Strategy must be recalculated |
6 planning actions before April 2027
Update pension nominations
Do nowComplete a fresh expression of wishes with every pension provider. An out-of-date nomination complicates both the pension payout and the post-2027 IHT reporting.
Model your estate with the pension included
Do nowAdd your pension pot to your estate value calculation. If the total exceeds your NRB + RNRB allowances, you have an IHT exposure. Quantify it before deciding on actions.
Review your drawdown order
Before 6 April 2027For basic-rate taxpayers: drawing pension cash and gifting it may be more efficient post-2027. For higher-rate taxpayers: spending ISAs and investments before the pension may remain optimal.
Make lifetime gifts
OngoingGifts fall outside the estate after 7 years (PETs). If the estate is large, systematic gifting from any asset source reduces the long-term IHT bill. Use the £3,000 annual exemption each year.
Consider whole-of-life insurance in trust
Before 6 April 2027A policy written in trust pays on death outside the estate. The IHT proceeds fund the bill without requiring beneficiaries to sell inherited assets. Premiums from surplus income may be exempt immediately.
Leave 10% to charity in your will
Update will before 2027A charitable legacy of at least 10% of the net taxable estate reduces the IHT rate from 40% to 36%. For a £2 million estate, this saves more in IHT than the gift costs.
Frequently asked questions
What exactly changes for pensions and inheritance tax in April 2027?
From 6 April 2027, unspent defined contribution (DC) pension funds remaining at death will be included in the deceased's estate for inheritance tax purposes. Currently, pension pots are outside the estate — they are not counted when calculating the value of the estate for IHT, and the pension trustees pay them to nominated beneficiaries free of IHT. After April 2027, the pension pot will be added to the estate value and IHT will apply at 40% above the nil-rate band (£325,000) and residence nil-rate band (up to £175,000) thresholds in the usual way. WHAT IS CHANGING: the pension fund itself (the remaining pot in a SIPP, personal pension, or workplace DC pension) will become part of the taxable estate. The pension scheme administrator will report the value to HMRC and will be responsible for paying IHT to HMRC before releasing the remaining funds to beneficiaries. WHAT IS NOT CHANGING: defined benefit (final salary) pension death-in-service payments and annuities are not affected. Spousal transfers are already exempt from IHT — a pension left to a spouse or civil partner passes free of IHT (as a spousal exemption), and this continues. The 2-year spousal exemption test that applies to some pension transfers is a separate issue from IHT. The 25% tax-free lump sum entitlement during the pension holder's lifetime is not affected — you can still take your tax-free cash. The LTA was abolished in April 2024. TIMING: while the change takes effect from 6 April 2027, the legislation must pass through Parliament and HMRC will issue technical guidance. There may be transitional provisions. However, the direction of travel is clear and planning should begin now.
Who is most affected by the pension IHT change from 2027?
The change most affects people who hold substantial DC pension pots and did not need to draw on them heavily during their lifetime — either because they had other income (e.g., DB pension, rental income, investment income, ISAs) or because they deliberately kept their pension pot intact as an estate planning tool. THE TYPICAL PROFILE: individuals aged 60–80 with a DC pension pot of £200,000+ who have largely lived off other assets; people who deliberately deferred drawdown to pass the pension to children; married couples where one spouse left a large pension pot for the surviving spouse; higher earners who received maximum employer pension contributions. SMALLER POTS: if your total estate (including the pension) is below your available nil-rate band (£325,000 NRB + up to £175,000 RNRB for a home passed to children = up to £500,000 per person; £1 million for a couple with unused NRB transfer), the change has no practical IHT impact — there would be no IHT regardless. LARGER ESTATES: if your estate is already comfortably above the NRB without the pension, the pension change is a direct increase in the IHT bill. A £300,000 pension pot added to a £600,000 estate that was already taxable means £120,000 more IHT (£300,000 × 40%). DB PENSION HOLDERS: if you have a final salary pension that pays a spouse's/dependant's pension on death, this is not affected — the pension scheme obligation to pay an ongoing pension to a dependant is not an asset in the estate. DB pensions are not a lump-sum pot and do not appear in the estate for IHT. It is only unspent DC (money purchase) pension savings that are brought in.
Should I start drawing down my pension faster to reduce IHT?
This is the most important planning question — and the answer depends on your income tax position and how fast you would need to drawdown to make a meaningful IHT difference. THE BASIC TRADE-OFF: withdrawing from a pension is subject to income tax at your marginal rate. A higher-rate taxpayer paying 40% income tax on a pension withdrawal and then investing the after-tax proceeds (which will also attract investment income/CGT) is often better off leaving the money in the pension even after the 2027 IHT change. The IHT saving from spending the pension is only 40% of the pension value — the income tax cost of withdrawing may be similar or higher. EXAMPLE: £100,000 in a pension. Option A — leave in pension, subject to 40% IHT at death = £40,000 IHT bill. Option B — draw down, pay 40% income tax = £60,000 net after tax. If you invest the £60,000 and it later falls into IHT on death anyway, the net is still £60,000 × (1 − 40%) = £36,000 to heirs. Leaving the pension and paying the IHT gives heirs £60,000 (£100,000 less £40,000 IHT) — better than drawing down and paying income tax. For a basic-rate taxpayer the maths shift in favour of drawdown: taking £100,000 from pension, paying 20% income tax = £80,000 net. Better than £60,000 after IHT. THE PRACTICAL STRATEGY: for higher-rate and additional-rate taxpayers, the conventional wisdom is to spend other assets first (savings, ISAs, investments) and draw the pension last. After 2027, this strategy needs refinement — spending the pension before IHT-exempt or ISA assets makes sense only if the income tax cost is less than the IHT cost. A PERSONALISED CALCULATION: use a financial planner or a cash-flow modelling tool to model your specific numbers. Variables include: age, marginal income tax rate, estate value, NRB available, RNRB available, other assets, investment return assumptions, and likely lifespan.
Does leaving my pension to my spouse still avoid inheritance tax after 2027?
Yes — spousal/civil partner exemption means assets passing to a spouse or civil partner are exempt from IHT regardless of the amount. Passing your pension to your spouse or civil partner on death will continue to be IHT-free after April 2027, in the same way that leaving a house or bank account to a spouse is IHT-free. However, the IHT deferral strategy (using the spousal exemption to defer IHT to the surviving spouse's death) becomes relevant for pensions from 2027 in the same way it already applies to other assets. SPOUSAL ROLLOVER: on first death, the pension passes to the surviving spouse IHT-free (spousal exemption). The surviving spouse now has their own pension pot plus the rolled-over pension. On second death, the combined pension pot is in the estate. However, the surviving spouse also has their own NRB (£325,000) plus any unused NRB transferred from the first death — this doubled NRB (up to £650,000) plus potentially doubled RNRB (up to £350,000) provides a total exemption of up to £1 million before IHT applies. For a combined estate of £1.5 million or less, the spouse rollover strategy may mean no IHT on either death even with the pension included. PENSION NOMINATIONS: it is critical to keep pension nominations up to date. The pension trustees rely on the expression of wishes / nomination form to decide who receives the pension after death. An out-of-date nomination (e.g., naming a deceased parent or an ex-spouse) creates complications. After 2027, the IHT reporting requirements will require the scheme administrator to cooperate with executors — this makes correct nominations even more important. Review your pension nominations alongside updating your will.
What are the main planning actions to take before April 2027?
There are six key planning actions to consider before the April 2027 pension IHT rules come in. (1) UPDATE PENSION NOMINATIONS: ensure each pension has a current, valid expression of wishes naming who you want to receive the fund. This is the most urgent and lowest-cost action. Contact each pension provider and complete their nomination form. (2) MODEL YOUR ESTATE WITH THE PENSION INCLUDED: calculate what your estate IHT bill will look like after 2027 if the pension is included. Include all assets: property, savings, investments, ISAs, business interests, and now the pension. Use this to identify whether action is needed. (3) REVIEW DRAWDOWN ORDER: if you are already in drawdown, reconsider the order in which you draw on different assets. For basic-rate taxpayers, drawing the pension down and giving cash away as PETs may be more efficient than before. For higher-rate taxpayers, spending taxable investments before the pension may still be optimal. (4) MAXIMISE LIFETIME GIFTS: if the estate is large enough that IHT will be payable even after the NRB and RNRB, consider whether lifetime gifts from any asset type (not just the pension) can reduce the overall bill. Gifts become PETs and fall outside the estate if the donor survives 7 years. (5) CONSIDER A WHOLE-OF-LIFE INSURANCE POLICY IN TRUST: a whole-of-life policy written in a trust pays on death free of IHT. The payout can cover the IHT bill. Premiums paid from regular income may qualify as 'normal expenditure out of income' — immediately IHT-exempt. This is a classic strategy for estates that will face IHT regardless of other planning. (6) CHARITABLE LEGACY IN YOUR WILL: leaving at least 10% of the net taxable estate to charity reduces the IHT rate from 40% to 36% — a meaningful saving for large estates and a way to do good while reducing the bill.
Related guides
Update your will before April 2027
With pensions now entering the estate for IHT, your will must coordinate your overall estate plan. A properly structured will can make the most of all available exemptions — including the spousal exemption, charitable legacy relief, and trusts for children.