For many years, pensions have been one of the most effective tools for long‑term saving, retirement security and, under current legislation, passing wealth efficiently to future generations. Historically, most unused defined contribution pension funds have fallen outside of a person’s estate for Inheritance Tax (IHT) purposes. This has allowed many high‑net‑worth individuals to preserve pension wealth while drawing income from other assets that would otherwise attract IHT.
However, significant legislative change is coming. From 6 April 2027, most unused pension funds and pension death benefits will be brought firmly into scope for Inheritance Tax. This is one of the biggest shifts in estate planning seen for decades and could expose families to substantial tax bills they may not currently be expecting.
What exactly is changing in 2027?
From 6 April 2027:
- Most unused defined contribution pensions — including SIPPs, personal pensions and workplace pensions — will now form part of the taxable estate on death.
- This means they may be subject to the standard 40% IHT rate if the overall estate exceeds the available nil-rate bands.
- The changes also apply to lump‑sum death benefits, including uncrystallised funds and remaining drawdown funds.
- Personal representatives will be responsible for reporting and paying the IHT on these pension assets.
- Executors will even have powers to direct providers to withhold pension funds for up to 15 months to settle the tax before beneficiaries receive anything.
Some important exemptions do remain:
- Pensions paid to a surviving spouse, civil partner or registered charity remain fully exempt from IHT.
- Defined benefit schemes and death‑in‑service benefits generally continue to fall outside of the estate.
Why this matters: the potential for a double tax charge
For anyone who dies after age 75, beneficiaries are already required to pay income tax at their marginal rate on pension withdrawals.
Under the new rules:
- Unused pension funds could be subject to IHT at 40%, and then
- Beneficiaries may pay income tax on what remains when they draw it.
This creates a real possibility of a double tax charge on pension wealth.
With many high‑net‑worth individuals having built up substantial pension pots — quite rightly encouraged by years of favourable tax treatment — these changes could materially distort long‑established retirement and legacy plans. The industry has already acknowledged how widely pensions have been used as a wealth‑transfer vehicle since Pension Freedoms in 2015, which is precisely what these reforms are intended to curb.
Why people are particularly at risk
For years, standard planning logic has been:
“Spend other assets first and preserve the pension — it’s outside the estate and grows tax efficiently.”
This made perfect sense under current rules.
However, from 2027, continuing to leave pensions untouched could significantly increase an individual’s eventual IHT liability, especially where estate values are already close to or above the £2 million taper threshold for the Residence Nil‑Rate Band.
For families with multiple assets — investment portfolios, property, business interests and pensions — the new rules introduce far more complexity and require a complete re‑evaluation of which assets should be drawn on first during retirement.
Now is the time to review your position
With just a short time before the 2027 changes take effect, now is the right moment for individuals and families to seek professional advice.
A thorough review should consider:
- Your life and retirement security
Your pension’s primary role remains to support you. It is vital to ensure your retirement income needs are safely met before making any decisions about drawing down or gifting assets.
- How the 2027 rules impact your estate
Understanding your overall projected estate value — including pensions — is crucial. For many individuals, including pension wealth may push estates into IHT exposure for the first time.
- The most tax‑efficient way to structure withdrawals
Balancing income tax, IHT, cashflow, investment strategy and longevity risk is essential. The right withdrawal strategy will differ for every client.
- How you want your wealth to pass on death
Once retirement security is assured, the remaining focus is legacy. The 2027 reforms may influence whether you use pensions, ISAs, investment portfolios, or trusts for long‑term estate planning.
Our advice for high‑net‑worth families
At Nelsons, we specialise in helping high‑net‑worth clients navigate complex, evolving tax and financial planning landscapes. The upcoming pension changes are significant, but with careful planning, clients can retain control, protect their wealth and ensure it passes to the people they intend — in the most efficient way possible.
If you or your clients have substantial pension funds and want clarity on how the 2027 IHT reforms may affect your future estate, now is the right time to review your arrangements and take informed action.
How can we help?
Zoe Till is a Partner and Chartered Financial Planner in our expert Independent financial advisers team. Zoe’s areas of expertise include investment advice, retirement planning, IHT and lifetime cash flow modelling.
If you would like any advice concerning the subjects discussed in this article, please get in touch with Zoe or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
Contact usIf this article relates to a specific case/cases, please note that the facts of this case/cases are correct at the time of writing.