What the 2027 Pension IHT Changes Mean for Your Estate Planning

From 6 April 2027, most unused pension funds form part of your taxable estate under the Finance Act 2026, which received Royal Assent on 18 March 2026. Where your estate exceeds the nil rate band, the pension is taxed at 40%, and where death occurs at or after age 75, beneficiaries face income tax on withdrawals on top of that.

Key takeaways

Pension funds are in scope for inheritance tax from April 2027, ending decades of favourable tax treatment
The combined IHT and income tax rate on an inherited drawdown pension can reach 64% for higher-rate taxpayer beneficiaries where death occurred aged 75 or over
The nil rate band has been frozen at £325,000 since 2009 and stays frozen until 2030/31, pulling more estates into the IHT net
Estate planning important actions: review nominations, drawdown order, wills, and trusts before April 202
Most planning steps remain available after April 2027, but reviewing your estate position sooner gives you more options.

At Netwealth, our financial planning services help clients build tax- efficient strategies that account for the new pension IHT rules. Speak to our team today.

IHT receipts reached £8.5 billion in 2025/26, and the OBR forecasts £14.5 billion by 2030/31, a 67% rise driven by the Autumn Budget 2024 reforms. An estimated £5.5 to £7 trillion will transfer wealth between UK generations over the next 30 years, and now pensions are inside the estate too.

What the Finance Act 2026 actually changes

Most UK pension schemes are discretionary structures, where scheme trustees hold assets and exercise discretion over who receives them on death. This meant unused pension funds could pass to beneficiaries outside the taxable estate. From 6 April 2027, that advantage ends.

Under the Finance Bill provisions now enacted, the value of your undrawn pension product will be added to your estate. The pension is treated as part of the members estate for IHT purposes and taxed at 40% above the available nil rate band. The government estimates that around 8% of estates will be affected, with approximately 10,500 new IHT-liable estates per year specifically because of pensions coming into scope. Government estimates suggest the average inheritance tax bill for affected estates will rise by around £34,000.

According to HMRC's impact assessment, around 213,000 estates will include inheritable pension wealth in 2027/28. Of those, 10,500 will become newly liable for IHT as a direct result of the pension changes, while a further 38,500 estates that were already in the IHT net will see their bill increase.

The average rise is estimated at around £34,000, though HMRC notes this is a static figure that does not account for behavioural responses such as faster drawdown, so it should be treated as a ceiling rather than a precise forecast.

This isn't a proposal. It's law.

Which pension types are affected, and which aren't

Not everything falls into the IHT net. The table below sets out what's in scope for your potential IHT liability and what remains outside it.

In scope	Out of scope
Unused drawdown funds	Death-in-service and service benefits (including non-active members)
Uncrystallised pension pots	Dependants' scheme pensions
Most lump sums and death benefits	Charity lump sum death benefits
DC pension funds not yet annuitised	Benefits left to a surviving spouse or civil partner

The spouse and civil partner exemption is maintained in full under the new IHT rules. No IHT is due on pension death benefits between spouses on first death. Concentrating pension wealth in the surviving spouse's estate does however create a larger IHT liability on second death, where many families in a civil partnership or marriage will find themselves exposed.

Pension scheme administrators now have new duties to support the personal representative, including withholding up to 50% of benefits for up to 15 months while IHT is calculated.

How the nil rate band interacts with your pension wealth

The nil rate band (NRB) is £325,000, with the residence nil rate band (RNRB) adding £175,000 where you leave your home to direct descendants, giving a combined threshold of £500,000. The HMRC nil rate band and residence nil rate band policy paper.

The nil rate band has been frozen since 2009 and remains frozen until 2030/31. More inheritance tax is being collected than at any point in two decades, and national statistics show the trend accelerating.

From April 2027, pension wealth also counts toward the £2 million residence nil rate band taper, which reduces by £1 for every £2 above that level, potentially eliminating your residence nil rate band entirely.

A worked example

An individual dies in 2027 with a £400,000 property (left to children), £200,000 in other assets, and a £300,000 pension pot: total estate £900,000. With combined NRB and RNRB of £500,000, the IHT bill is approximately £160,000.

Under the old rules, the £300,000 pension pot would have sat outside the estate, leaving a taxable estate of £100,000 and an IHT bill of £40,000. The pension change alone adds £120,000 to the bill in this example.

The combined tax rate on inherited drawdown pensions

Where the pension holder dies aged 75 or over, pension beneficiaries pay income tax at their marginal rate on drawdown from the inherited pension product, on top of any IHT already paid. This double taxation dynamic is the most important thing to understand about the new tax rules.

Beneficiary tax band	IHT charge	Income tax on remainder	Effective combined rate
Higher rate (40%)	40%	40%	64%
Additional rate (45%)	40%	45%	73%

The Finance Act 2026 includes double taxation relief, meaning beneficiaries will not pay income tax on the portion of pension income that went toward settling the IHT bill. The net effective rate will therefore be lower than these figures suggest, though the exact position depends on individual circumstances and full HMRC guidance is still to be published.

If the pension holder died before age 75, income tax does not apply to beneficiaries. Only the 40% IHT charge applies, making the age-at-death distinction critical to legacy planning and funding retirement.

What should I review before April 2027?

Estate planning ensures that your assets are managed and passed on according to your wishes. Having an estate plan in place can reduce complications and stress for your loved ones during a difficult time. An effective estate plan includes legal and financial tools designed to manage assets during a person’s lifetime and distribute them after death, reducing what your beneficiaries need to pay inheritance tax on. Work through the steps below with a qualified financial adviser.

Update your nomination forms

Review your expression of wishes with every pension scheme you hold. A nomination to a spouse or civil partner preserves the IHT exemption on first death. Nominations to children no longer carry the same tax- free advantage; many people haven't reviewed them since the 2015 pension freedoms. Planning ahead costs nothing and can make a significant difference.

Do a full estate valuation including your pension

Many people have calculated their IHT position without including pension savings. Add your pension to the picture, check whether your total estate exceeds the nil rate band thresholds, and check whether it pushes you above the £2 million RNRB taper. This is where you'll find your potential IHT liability.

Reconsider your drawdown order

The old advice was to preserve the pension as long as possible, treating it as a tax planning vehicle outside the estate. That logic has changed. Drawing from the pension in a tax efficient way earlier, spreading income across multiple tax years, can reduce the pot subject to IHT while managing your income tax. Your retirement planning strategy needs to reflect the new tax treatment.

Use gifting allowances

You can give up to £3,000 in any one tax year free of IHT. If you do not use the full amount, you can carry the unused balance forward to the following tax year only, allowing a maximum of £6,000 in that year. The exemption cannot be accumulated beyond one year.

Gifts made more than seven years before your death are generally exempt from Inheritance Tax; this is often referred to as the seven-year rule, with taper relief reducing the charge on gifts made between three and seven years before death.

Gifts from surplus income that don't affect your standard of living are also exempt under normal expenditure rules with no upper limit, making it one of the most tax efficient ways to transfer wealth during your lifetime.

At Netwealth, our financial planners can help you build a tax-efficient gifting strategy that works alongside your wider estate plan.

Consider trusts and life insurance

A trust is a legal arrangement where a trustee holds assets on behalf of a beneficiary, helping to manage and protect assets until the beneficiary is capable of handling them responsibly. Trusts can be used in estate planning to reduce inheritance tax liabilities, as assets placed in certain types of trusts may fall outside the estate for tax purposes.

Discretionary trusts allow trustees to decide how to distribute assets among beneficiaries; bare trusts are those where beneficiaries have an immediate right to the assets.

Life insurance policies written in trust pay a lump sum outside the estate, avoiding IHT on the payout. With pension funds now inside the IHT net, this is one of the most practical tools available.

Review your will, executor, and lasting powers of attorney

A will is a legally binding document expressing your final wishes regarding your estate and assets. Without one, your assets pass under the rules of intestacy, which may not align with your wishes and can lead to complications for your loved ones. It is advisable to regularly review and update your will to reflect any changes in your circumstances, such as marriage, divorce, or the birth of children.

The executor of a will is responsible for managing the deceased's estate, which includes settling debts, paying taxes, and distributing assets according to the will's instructions. Executors must ensure that all assets are accounted for and valued accurately, which may involve professional appraisals. One of the key responsibilities of an executor is to settle outstanding debts and taxes before distributing the remaining money to beneficiaries, which under the new rules includes coordinating with pension scheme administrators to calculate IHT due on pension assets.

A power of attorney is a legal document that allows you to appoint one or more individuals to manage your affairs if you become incapacitated. There are two types of lasting power of attorney: one for property and financial affairs, and another for health and welfare decisions. Setting up a lasting power of attorney provides peace of mind for you and your loved ones. Reviewing and updating an estate plan every 3 to 5 years or after major life events is advisable.

Charitable donations

If you leave at least 10% of the taxable part of your estate to registered charities, the effective Inheritance Tax rate can be reduced from 40% to 36%. That can make a significant difference to the remaining money available to your beneficiaries.

Start your estate planning review now

With less than a year until April 2027, the window to act is short.

Use MyNetwealth to see where you stand, or book a financial planning MOT with one of our advisers. Our low all-in fees mean more of your pot reaches your beneficiaries, and through the Netwealth Network families can invest together at reduced fees, making intergenerational planning more efficient from the outset.

Speak to our team today

Please note: the value of your investments can go down as well as up. Netwealth offers advice restricted to our services and does not provide independent advice across the market. This article does not constitute financial advice and should not be interpreted as a personal recommendation. Tax treatment depends on individual circumstances and tax rules may change.

Frequently Asked Questions

How do the 2027 pension IHT changes affect my estate planning?

From 6 April 2027, unused pension funds form part of your taxable estate under the Finance Act 2026. If your estate exceeds the nil rate band of £325,000 (or £500,000 with the residence nil rate band), the excess is taxed at 40%. Plans built on the assumption that pensions sit outside the estate need reviewing now.

What are the pension inheritance tax changes coming in 2027?

The Finance Act 2026 brings unused pension funds and pension death benefits into the IHT net from 6 April 2027. Previously most pensions sat outside the deceased estate through non-discretionary schemes. Your undrawn pension is taxed at 40% above the nil rate band; the spouse and civil partner exemption is maintained.

What happens to my pension when I die, and will my children pay tax on it?

From 6 April 2027, your unused pension forms part of your members estate for IHT unless it passes to a surviving spouse or civil partner. If you die aged 75 or over, your children also pay income tax when drawing the inherited pension. For a higher-rate taxpayer beneficiary, the combined effective rate can reach 64%.

Does the spouse exemption still apply under the new IHT rules?

Yes. Pension death benefits passed to a surviving spouse or civil partner remain fully exempt from IHT under the new rules. However, this means pension wealth accumulates in the surviving spouse's estate, which can increase the IHT liability on second death. It is worth reviewing your overall estate position to understand the combined picture.

What should I do with my pension now that it's subject to inheritance tax?

Include your pension in a full estate valuation to understand your IHT liability. Then update nomination forms, review drawdown order, and explore whether gifting, trusts, or life insurance written in trust can reduce your tax bill. The right approach depends on income, other assets, and individual circumstances; always seek professional help.

Is equity release relevant to the pension IHT changes?

Equity release can reduce your estate value, but only if the funds released are spent or gifted rather than held as cash or other assets; otherwise the value simply moves from property to a different part of the estate.

How do I balance inheritance planning with funding retirement?

Pensions are no longer automatically the most tax efficient asset for legacy planning. Drawing down earlier while using tax free ISA withdrawals may mean more money reaches your beneficiaries. Consult a financial adviser to balance funding retirement with leaving property and other assets to your family.