Inheritance Tax on pensions: Could 2027 changes push your estate over the threshold?

For years, pension wealth has been an important part of estate planning because it has generally sat outside an individual's estate for Inheritance Tax (IHT) purposes. However, significant changes are scheduled to take effect from April 2027, potentially bringing more individuals within the scope of the tax for the first time. According to a recent report, approximately one in five pensioner households could have sufficient assets to face a potential IHT liability if the pensioner and any spouse were to die at that point.

The IHT threshold: How much can you pass on before Inheritance Tax applies?

The IHT threshold is the maximum value an estate may hold before it becomes eligible for the tax, usually charged at 40% of the value at the time of death.

The standard nil-rate band has remained frozen at £325,000 and is scheduled to remain so until at least 5 April 2031. Individuals may also qualify for an additional residence nil-rate band of up to £175,000 if a qualifying main residence is passed to a direct descendant – this is scheduled to stay at this level until at least 5 April 2030. This means that the IHT threshold for some individuals could be £500,000, with married couples and civil partners able to potentially pass on up to £1 million tax-free, depending on their circumstances.

While £1 million may seem a significant figure, that is the best case scenario. Those who are not married and/or do not own a qualifying property, may be looking at only £325,000. Regardless, increasing property values and the need to include pension pots, can soon take an estate over even the higher limit.

Who could be affected by pension Inheritance Tax changes?

You may wish to review your estate planning if you:

• Have significant pension savings that are unlikely to be fully spent during retirement
• Own a business and are thinking about retirement or succession planning
• Have an estate that is approaching the IHT threshold
• Expect to pass wealth to children, grandchildren or other beneficiaries
• Have not reviewed your estate planning arrangements in recent years

Whether these changes are likely to affect you will depend on your individual circumstances, including the value of your assets, pension savings and any available allowances. A review with a qualified financial planner can help you understand your position.

Steps to consider before April 2027

1. Review the value of your estate - Consider your current estate position and how the inclusion of pension assets could affect your family's future IHT exposure. This is particularly important if your estate also includes business or agricultural assets, as changes introduced in April 2026 have increased potential IHT charges on assets which used to be exempt. Given these significant changes, planning strategies that were appropriate a few years ago may no longer deliver the same outcome after the changes take effect.
2. Understand the Inheritance Tax gifting rules - Gifting can be a useful way of reducing the value of your estate, but the IHT gifting rules are specific, and depend on the type of gift made and the value of your estate. Certain exemptions are available – including annual gift allowances and gifts made out of surplus income – while other gifts may fall outside an individual's estate entirely after a qualifying seven-year period. Understanding which rules apply to your circumstances is an important part of any gifting strategy.
3. Explore trust arrangements - Trusts can form part of a wider estate planning strategy. In some cases, they may assist with managing how assets are passed to future generations and could offer inheritance tax planning opportunities, although they are subject to their own legal, tax and administrative requirements. While April 2027 may seem some way off, effective estate planning often takes time. The earlier individuals understand how the proposed changes could affect their estate, the more options they may have available.

For some families, a review may confirm that little action is required. For others, the changes could significantly alter long-term succession and wealth transfer plans.

We're here to help

Our specialists can help you understand how the 2027 Inheritance Tax on pensions changes could affect your estate, assess any potential tax exposure and identify potential planning opportunities that may align with your personal and family objectives.

Our client-focused approach offers a well-rounded, comprehensive and cohesive strategy tailored for your needs, with the ability to support conventional financial planning with expert advice from our dedicated tax advisory team.

If you would like to discuss your estate planning strategy, please get in touch with a member of our specialist team.

Important Information

1. This article does not constitute financial advice
2. Pension rules, including tax and death benefit rules, may change.
3. You should seek regulated financial advice before making any decisions relating to pension or retirement income.
4. The Financial Conduct Authority does not regulate tax advice, estate planning or trust advice in all circumstances. Tax treatment depends on individual circumstances and may change in the future.