Pensions and Inheritance Tax: Big Changes Coming in 2027

From 6 April 2027, the way pensions are treated for inheritance tax (IHT) will change significantly. Currently, unused pension pots can often be passed on free of IHT. This makes pensions an effective estate planning tool.

But what exactly is an “unused pension pot”?

In simple terms, this refers to pension savings that remain in your pension scheme at the time of your death. These are funds that you have not yet withdrawn or used for retirement income.

This could include:

• A workplace pension
• A private pension (personal pension or SIPP)
• Certain overseas pension schemes

These funds remain within a pension wrapper, managed by a pension provider. They are not held in a standard bank account.

It is important to understand that:

• Money in a normal savings account is not a pension
• ISAs, including Lifetime ISAs (LISAs), are not treated as pensions for IHT purposes
• Only funds held within a recognised pension scheme qualify as a “pension pot”

This distinction is key, as pensions have historically benefited from different tax treatment compared to other assets.

According to industry estimates, billions of pounds remain in unused pension savings across the UK. Many individuals deliberately preserve their pension and instead draw on other assets in retirement. This strategy has been widely used to pass wealth to the next generation in a tax-efficient way.

However, under the new rules, most unused pension funds and death benefits will be included in your estate for IHT.

This could significantly increase the tax your family pays.

What Is Changing in 2027?

The government is reforming how pensions are treated on death.

From April 2027:

• Unused pension pots will form part of your estate for IHT
• The current IHT exemption for many pension death benefits will be removed
• Personal representatives will be responsible for reporting and paying IHT
• Pension scheme administrators will need to provide detailed information

These changes apply to most registered pension schemes and certain overseas pensions.

Some benefits will remain exempt, including:

• Transfers to spouses or civil partners
• Death-in-service benefits
• Dependants’ scheme pensions

What This Means for You

These changes could have a significant impact on your estate.

You may find that:

• Your estate becomes liable for more inheritance tax
• Your beneficiaries receive less than expected
• Pension planning is no longer separate from estate planning

Many people have relied on pensions as a tax-efficient way to pass on wealth. This may no longer be the case.

A Practical Example

Consider this scenario:

• You have an unused pension pot worth £300,000
• Under the new rules, this is included in your estate
• If IHT applies at 40%, this could create a £120,000 tax liability

If the beneficiary then pays income tax on withdrawals, the total tax burden could be even higher. In some cases, the combined tax rate could reach up to 67%.

Understanding the Tax Impact

The interaction between inheritance tax and income tax is important.

• IHT may apply at 40% on death
• Beneficiaries may also pay income tax when withdrawing funds
• This can significantly reduce the value passed on

However, there are still reliefs available.

For example:

• Transfers to spouses and civil partners are usually exempt
• Gifts to charities remain exempt from IHT

Planning ahead is essential to manage these risks.

New Responsibilities for Personal Representatives

The changes will also affect how estates are administered.

Personal representatives (the people dealing with your estate) will need to:

• Work with pension providers to obtain valuations
• Report pension assets to HMRC
• Ensure IHT is paid correctly

In some cases, they may ask pension providers to withhold part of the funds to cover tax.

This adds a new layer of complexity to estate administration.

Steps to Take Before 2027

There is still time to plan.

You should consider:

• Reviewing your pension nominations
• Checking who your beneficiaries are
• Considering whether to draw down pension funds earlier
• Reviewing your will and overall estate plan
• Exploring trust options where appropriate
• Taking professional advice

Early planning can help reduce your tax exposure and protect your family.

How mlplaw Can Help

At mlplaw, we help clients prepare for changes like these with clear and practical advice.

Our Wills, Trusts and Probate team can:

• Review your pension and estate planning strategy
• Advise on tax-efficient ways to pass on wealth
• Update your will to reflect the new rules
• Help you balance income needs with long-term planning

We take the time to understand your situation and guide you through complex changes.

Conclusion

The 2027 pension changes represent a major shift in estate planning. Pensions may no longer offer the same inheritance tax advantages. Without planning, your estate could face a higher tax bill. By taking advice now, you can put the right structures in place and protect your family’s future.