New UK Pension IHT Rules from April 2027: What Families Need to Know Now

Big changes are coming to UK pensions and inheritance tax (IHT) and they could have a major impact on how your estate is passed on.

As part of the first Budget from the new Labour government in autumn 2024, significant changes were announced regarding pensions and inheritance tax (IHT).

From 6 April 2027, most unused pension funds and certain death benefits will become subject to IHT representing a major shift in estate planning strategy for many individuals.

What’s Changing?

For deaths occurring on or after 6 April 2027:

• Unused defined contribution pension funds will be included in the value of an estate for IHT purposes.
• These funds will typically be taxed at 40%, leaving 60% for beneficiaries.
• Pension scheme administrators will be responsible for reporting and paying the IHT directly to HMRC.
• The nil-rate bands (including the residence nil-rate band, if applicable) will be apportioned between the pension and the rest of the estate.

This approach avoids forcing beneficiaries or executors to pay IHT from other estate assets or draw funds from the pension (which might otherwise attract income tax).

Which Pensions Are Affected?

Defined Contribution (DC) Schemes
Any unused funds remaining in the pot at death will be subject to IHT.

Defined Benefit (DB) Schemes
These typically do not leave an inheritable fund, but lump sum death benefits or dependent pensions may be taxable under the new rules.

Note: Transfers to a surviving spouse or civil partner will still benefit from the spousal exemption.

In most cases, IHT will apply only after the second death in a married couple.

What Can You Do Now?

With these changes on the horizon, it’s a good time to review your retirement and estate planning strategy.

Here are some steps to consider:

Gift Cash Instead of Adding to Your Pension

If you have available cash, gifting it now will start the seven-year IHT clock. Surviving seven years after the gift can result in full IHT relief.

Take Your Lump Sum and Reallocate

Withdraw your pension tax-free lump sum and:

• Gift it to family
• Invest in IHT-efficient solutions like loan trusts or discounted gift trusts
• Or simply spend it, reducing your estate value

Purchase an Annuity and Gift Income

If you don’t need the additional income, consider using annuity payments for ‘gifts out of income’:

• These gifts are immediately IHT-exempt
• No seven-year rule applies
• You must maintain clear records to show the gifts come from surplus income

Purchase an Annuity and spend, spend, spend!

Pensions have historically been a good way to pass wealth on to the next generation.

However this wasn’t the intention.

Pensions were designed to provide income during retirement so why not upgrade your holidays or treat yourself and your family to a few luxuries – enjoy!

Do Nothing (In Some Cases)

Pension funds still grow free from income tax and capital gains tax.

Depending on your estate size, leaving funds in your pension may remain a tax-efficient strategy.

Need Help?

This is a complex area, and the right strategy depends on your personal financial circumstances.

Getting in touch 

To discuss your situation or request an inheritance tax review, call us on 01634 731390 or email Jan Friend.

We work with clients to minimise inheritance tax, protect family wealth, and create smart, future-focused pension strategies.

Our services

If you would like to find out more about some of our services that might help you please take a look at our related pages:

High Net Worth Individuals 

Estate Planning

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The content in this blog is correct as at 10th July 2025. See terms and conditions.