6 April 2027. That’s the day a tax strategy used by Scottish families for decades stops working.
For years, pension savers across Scotland followed a simple plan: draw income from ISAs first, leave savings alone, and preserve the pension pot for the next generation. The approach worked because unused pensions sat outside inheritance tax calculations entirely. Come 2027, that exemption vanishes.
Chancellor Reeves revealed the shift in her Autumn 2024 Budget statement. Most unused pension funds and death benefits will be dragged into the inheritance tax net from April 2027. Technical details are still emerging, but the direction is clear—and the window to adapt is closing fast.
The mechanics matter here.
Currently, unused defined contribution pension funds don’t form part of someone’s estate for inheritance tax purposes. When death occurs before age 75, beneficiaries often receive the pot free of income tax. The funds pass outside the estate entirely, nominated to children or grandchildren without HMRC taking a cut.
That changes in 2027. Unused pension funds will be added to the taxable estate, meaning anything above the £325,000 nil-rate band faces inheritance tax at 40%. For estates passing to direct descendants, the threshold rises to £500,000—but that still catches substantial pension pots accumulated over 30 or 40 years of contributions. Property, savings, investments, and now pensions all count toward the same limit.
Some exemptions survive. Pension death benefits passed to a spouse or civil partner remain inheritance tax-free, provided both are UK domiciled. Dependants’ scheme pensions and charity lump sum death benefits also escape the new rules. Death-in-service benefits paid from registered pension schemes sit outside the estate entirely.
But for families hoping to pass an unspent pension pot to adult children, the landscape has shifted.
Government data suggests around 10,500 additional estates per year will be caught by inheritance tax as a result of the change. Another 38,500 estates will face higher tax bills than under current rules. Those figures sound modest—until you consider how many families should be planning now but aren’t.
Who’s in the crosshairs? Savers with substantial defined contribution pension funds, often built over decades. Homeowners whose property, combined with pension wealth, pushes their estate above the threshold. Those who’ve deliberately drawn income from ISAs or other accounts to keep the pension intact for inheritance. Anyone who hasn’t revisited their estate plan since the Autumn 2024 Budget.
There’s a subtler pressure at work, too. Inheritance tax thresholds are frozen until 2030. Property values across Edinburgh, Glasgow, and Ayrshire have climbed steadily in recent years. For many families, rising house prices plus pension wealth now push estates toward the £2 million mark—the point where the residence nil-rate band begins to taper and eventually disappears entirely. Adding a previously exempt pension pot to that calculation accelerates the problem.
What can families actually do before April 2027 arrives?
Revisiting the drawdown strategy makes sense for many. If you’ve been deliberately preserving the pension for inheritance whilst drawing from other assets, the rationale for that approach has collapsed. Drawing more from the pension during your lifetime may now produce better outcomes for beneficiaries, freeing up other assets for gifting.
Lifetime gifting remains one of the most effective tools available. Assets gifted outright more than seven years before death generally fall outside the estate. For those with pension wealth they don’t expect to need, drawing it down and making considered lifetime gifts can reduce inheritance tax exposure whilst transferring wealth in a planned, purposeful way. The seven-year clock matters—waiting until 2025 or 2026 to start gifting may leave insufficient time for the strategy to work.
Whole-of-life insurance written in trust offers a different route. A correctly structured policy, written into a suitable trust, can provide a lump sum to beneficiaries specifically to cover an inheritance tax liability—without increasing the taxable estate. For some clients, this creates a clean solution that protects both pension and estate simultaneously.
Updating expressions of wishes has become more urgent. Who you’ve nominated to receive pension death benefits matters more than it did six months ago. With the inheritance tax spousal exemption still applying, there may now be a compelling case to nominate a spouse or civil partner where previously you’d nominated adult children—and then allow the spouse to pass wealth on in a more tax-efficient manner. Outdated nomination forms risk creating unnecessarily large tax bills for families already dealing with grief.
Trust planning may offer additional flexibility, though this is complex territory. The interaction of pension rules, trust law, and inheritance tax legislation requires careful, personalised analysis. For high-value estates, the effort can prove worthwhile.
The administrative burden on families shouldn’t be underestimated. Personal representatives will now be responsible for reporting and paying inheritance tax on pension assets. Estates that haven’t planned ahead may take significantly longer to administer, with funds withheld while tax obligations are settled. For executors juggling multiple pension pots, property in different parts of Scotland, and beneficiaries with varying income tax profiles, the complexity multiplies quickly.
The difference between adequate and excellent advice can be measured in tens of thousands of pounds. Inheritance tax rates, income tax on inherited drawdown, frozen nil-rate bands, and tapering residence allowances all interact in ways that aren’t immediately obvious. A strategy that works for one family may be entirely wrong for another with only slightly different circumstances.
AB Vision Financial, the independent financial advisers based in Ayr, works with clients across Ayrshire, Edinburgh, Glasgow, and beyond on exactly this type of planning. As pension specialists independent of any particular provider, the team can assess the whole financial situation—pension wealth, property, investments, family dynamics—and develop tailored strategies rather than off-the-shelf solutions.
The clock runs down. By early 2027, options that exist today may have narrowed or disappeared entirely. Families who’ve spent decades building pension wealth and carefully planning its transfer face a choice: adapt the strategy before April 2027, or watch a significant portion of that wealth disappear to inheritance tax.
Whether enough families will act before the deadline remains to be seen.
