For years, pensions have been the exception to the inheritance tax rules: a pot of money you could leave untouched and pass on to your family largely free of the 40% tax that applies to the rest of your estate. From 6 April 2027, that exception disappears.
Under changes first announced in the Autumn Budget 2024 and now bedding in ahead of the 2027 start date, most unused defined contribution pension funds and death benefits will be brought inside the value of your estate for inheritance tax purposes. In practice, that means anyone who has deliberately drawn down other assets first and left their pension untouched “for the kids” could find a significant chunk of it taxed at 40% once the estate passes above the available nil-rate band.
It is a bigger shift than the headline suggests. Pension and inheritance tax planning have traditionally sat in separate conversations: one about retirement income, the other about wills and estates. From next April, they are effectively the same conversation. A decision about when to draw your pension, how much to take, and who you nominate as a beneficiary now has direct inheritance tax consequences, on top of the income tax questions that already applied.
With the nil-rate band frozen and the main residence allowance tapering away for larger estates, more families than ever were already being pulled into inheritance tax. Adding pensions into the mix, often one of the largest assets on the balance sheet by retirement, means estates that have never previously faced an inheritance tax bill may need to think again.
What this means in practice
The changes will affect people differently depending on the size of their estate, how much they rely on their pension for income, and who they intend to leave it to (transfers between spouses and civil partners remain exempt, which softens the impact for many). But for anyone with a meaningful pension pot, the questions worth asking now include: does it still make sense to leave pension funds untouched in favour of other assets? Are beneficiary nominations up to date and aligned with the wider estate plan? And does gifting, trust planning, or a change in drawdown strategy make sense before the rules take effect?
None of these are decisions to make in isolation, and getting them wrong, or leaving them too late, is expensive. This is exactly the kind of crossover between pension strategy and estate planning that the Beaumont Wealth pension advisers deal with regularly: reviewing how a pension fits alongside the rest of an estate and adjusting the plan so clients aren’t caught out when the new rules land in April 2027.
With less than a year until the change takes effect, and further detail expected as the government finalises the legislation, now is a sensible time for anyone with a meaningful pension to get an independent view on how the rule will affect their specific circumstances, rather than waiting until the deadline is close.
