2027 IHT reform: Time is running short to review pension planning

With less than a year to go until significant changes to the inheritance tax (IHT) treatment of pensions are expected to come into force, individuals and families are entering a crucial planning window.

2027 IHT reform: Time is running short to review pension planning

The next 12 months are an important period

From April 2027, current proposals will fundamentally change how many defined contribution pension funds are treated on death. For those with sizeable pension savings - or where pensions form a core part of family wealth - assumptions that have underpinned pension and estate planning for many years will no longer hold true.

While pensions will remain a highly valuable and tax‑efficient planning tool, the way they fit into long‑term wealth and succession planning is shifting. Taking time now to review arrangements could make a meaningful difference to future outcomes.

What is changing?

Under the proposed rules expected to come into effect from April 2027, most unused defined contribution pension funds and related death benefits may be brought within the scope of IHT on death.

This represents a significant departure from the longstanding position under which pensions were generally excluded from an individual’s estate for IHT purposes. While some exclusions are expected to remain - such as certain defined benefit dependant pensions and death‑in‑service benefits - the overall impact for many families could be substantial.

In practical terms, unused pension funds may now:

Be subject to IHT at up to 40%, depending on the size of the overall estate
Contribute to the tapering of the residence nil rate band (RNRB) where the estate exceeds £2 million
Give rise to income tax of up to 45%, when beneficiaries subsequently draw the funds
Increase beneficiaries' taxable income, potentially resulting in the tapering of their Personal Allowances where their income exceeds £100,000. The combined effect of these factors could materially reduce the value ultimately passed on to the next generation if existing planning is not reviewed in advance.

The actual impact will vary depending on individual circumstances, available allowances and planning choices.

Why the next 12 months matter

While April 2027 may still feel some way off, early action is critical

Pension decisions are rarely isolated. Choices around contributions, drawdown, nominations and investment strategy interact closely with:

Retirement income planning
Wider estate and succession objectives
Liquidity needs and lifetime gifting strategies

Leaving reviews until the changes are in force could limit the options available and reduce flexibility. In contrast, acting now allows time to model different outcomes, make gradual adjustments and ensure decisions remain aligned with long‑term goals.

Reviewing pensions as part of a wider plan

Perhaps the most important takeaway is that pensions can no longer be viewed only through an income tax and cash-flow planning lens.

The forthcoming changes reinforce the need to review pensions as part of a wider, joined-up plan - working closely with our Tax Advisory teams on planning, rather than treating pensions in isolation. This means assessing pensions alongside:

Other taxable assets
Potential IHT exposure
Family circumstances and beneficiaries’ needs

This joined‑up approach helps identify whether existing strategies continue to achieve the intended balance between income, flexibility, tax efficiency and legacy planning.

Common areas to review now

With the change on the horizon, individuals may wish to consider:

Whether pension death benefit nominations remain up to date and appropriate
How and when pension funds might be accessed, and the impact on future IHT exposure
The role pensions play relative to other assets held outside the pension environment

How pensions fit alongside gifting, trusts or other estate planning strategies. There is no single “right” approach - the most suitable strategy will depend on personal circumstances, objectives and risk tolerance. Any recommendations would only be made following a full review of your individual circumstances.

Avoiding last‑minute decisions

One of the risks of major tax change is reactive decision‑making. Pensions are complex, long‑term arrangements, and rushed choices made close to implementation dates can lead to unintended consequences.

The current window provides an opportunity to plan carefully, stress‑test assumptions and adjust strategies in a considered way - rather than being forced into rapid change later.

A shift in mindset

The proposed pension and IHT reforms do not remove the value of pensions. Instead, they underline the importance of coordinated, forward‑looking planning.

With less than 12 months to go, the focus should not be on wholesale change, but on understanding how the rules are evolving and ensuring existing plans remain fit for purpose in the years ahead.