Are you ready for the pension and inheritance tax changes in 2027?

For years, pensions have been one of the most tax‑efficient ways to pass on wealth. Unused defined contribution (DC) pension funds have typically sat outside your estate for inheritance tax (IHT) purposes, making them a powerful estate‑planning tool.

From 6 April 2027, that advantage changes.

Under reforms announced in the Autumn Budget 2024, most unused DC pensions will be brought into the scope of IHT. It’s one of the biggest shifts in UK retirement and estate planning in decades — and something individuals and families should be preparing for now.

What’s changing?

Currently, unused pension funds are excluded from your estate when calculating IHT. From April 2027:

• Most unused DC pension funds will be included in your estate
• They could be taxed at up to 40% if your estate exceeds available thresholds
• The rules apply to undrawn funds, drawdown balances and certain death benefits
• Transfers to a spouse or civil partner remain exempt, but transfers to children may now trigger a significant tax bill

The aim is to discourage using pensions primarily as a wealth‑transfer vehicle and refocus them on providing retirement income.

Who is likely to be affected?

Government messaging suggests most estates still won’t pay IHT — but the numbers tell a different story:

• Around 10,500 estates a year are expected to face an IHT charge where none existed before
• A further 38,500 estates could pay more tax than under current rules
• The average increase in liability is estimated at £34,000

With thresholds frozen until at least 2030 and asset values rising, more families — especially those with property and pension wealth — are likely to be drawn into the IHT net.

This is no longer just an issue for the very wealthy.

The risk of “double taxation”

If you die after age 75:

• Your pension could first be subject to IHT at up to 40%, and
• Beneficiaries may then pay income tax on withdrawals

In some cases, this could push the effective tax rate above 60% — a significant erosion of pension wealth before it reaches the next generation.

What should you be doing now?

With less than a year to go, early planning is essential. The right approach will depend on your circumstances, but the following strategies are increasingly relevant.

1. Review your retirement income strategy

The long‑standing approach — spend ISAs and other assets first, preserve the pension — may no longer be optimal.

For some people, it could now make sense to:

• Draw more from the pension during their lifetime
• Reduce the amount exposed to IHT
• Avoid the risk of double taxation

This must be balanced against income‑tax considerations and your long‑term income needs.

2. Time your tax‑free cash carefully

If you die without having taken your tax‑free lump sum, the opportunity disappears.

For those approaching age 75, reviewing the timing of tax‑free cash may be sensible. Taking it earlier could:

• Reduce the pension value exposed to IHT
• Allow you to reinvest or gift the funds more efficiently
• Avoid double taxation if the funds would otherwise remain in the pension

If you want to keep the money invested, an ISA may be a suitable home.

3. Increase your focus on lifetime gifting

Gifting remains one of the most effective ways to reduce the value of your estate.

Key allowances include:

• £3,000 annual gift allowance
• Wedding gifts (up to £5,000 for a child)
• Small gifts of up to £250 per person
• Regular gifts from surplus income, which can be unlimited if properly documented

With pensions entering the IHT net, accelerating gifting plans may become more attractive.

4. Consider using annuities strategically

This is one of the most important — and often overlooked — planning opportunities.

Annuities convert pension wealth into a secure income stream, which can then be used for:

• Day‑to‑day spending, or
• Regular gifting from surplus income, which is immediately exempt from IHT

Because annuity income is predictable, it’s easier to demonstrate to HMRC that gifts are genuinely from surplus income.

Drawdown can achieve similar outcomes, but the administrative burden is higher. For some retirees, annuities may become a valuable tool for reducing future IHT exposure while maintaining financial security.

5. Revisit your wider estate planning

The 2027 changes reinforce the need for a holistic approach.

This may include:

• Reviewing how assets are allocated across pensions, ISAs and general investments
• Ensuring expression‑of‑wish forms are up to date
• Considering whether trusts could help manage how and when beneficiaries receive funds
• Exploring life insurance written in trust to help cover future IHT liabilities

The key is integration — pensions can no longer be viewed in isolation.

6. Rethink where different assets are held

Previously, advisers often placed higher‑growth assets inside pensions because they were outside the IHT net.

From 2027, the logic may flip.

For some people, it may now be more efficient to:

• Hold income‑producing assets inside the pension (if you plan to draw from it earlier)
• Hold higher‑growth assets in ISAs or general investments

This is highly individual and should be reviewed regularly.

7. Review your beneficiaries and control structures

Who inherits your pension — and how — matters more than ever.

Consider:

• Whether your expression‑of‑wish forms reflect your current intentions
• Whether a trust structure is appropriate for larger or more complex estates
• Whether charitable giving could reduce your overall IHT liability

Leaving at least 10% of your estate to charity can reduce the IHT rate on the remainder from 40% to 36%.

A shift in mindset

The biggest takeaway is simple:

Pensions are no longer a guaranteed safe haven from inheritance tax.

For years, the prevailing strategy was to preserve the pension and pass it on efficiently. From 2027, that approach may need to be reversed — or at least reconsidered.

Pensions remain highly tax‑efficient for retirement saving, but their role in estate planning is changing.

How Kellands can help

At Kellands, we understand that changes like these can feel complex and uncertain. But they also present an opportunity to take control of your financial future.

Our financial planners can help you:

• Understand how the 2027 changes affect your personal situation
• Review your pension, investment and estate‑planning strategy
• Identify practical steps to help mitigate unnecessary tax
• Build a plan aligned with your long‑term goals and family priorities

If you’d like to discuss how these changes may affect you, please contact your usual Kellands financial planner or speak to a member of our team.

Please note 

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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