The 2027 IHT Pension Shock: A Complete Guide to the New Rules & How to Prepare Your Estate
For decades, pensions have been the “golden ticket” for estate planning—a secure vault sitting almost entirely outside of Inheritance Tax. Following the 2024 Autumn Budget, that is all about to change.
From 6 April 2027, most unused pension funds will be brought into the value of your estate for IHT purposes. This isn’t a minor tweak. It’s a fundamental rewrite of the rules, a direct consequence of the 2023 abolition of the pension Lifetime Allowance (LTA), which the government believed opened a door for “unlimited” tax-free wealth transfer.
This guide will break down exactly what is changing, who is at risk, the devastating impact of “double taxation,” and provide a clear, actionable checklist to prepare your estate.
[Common Client Misconception]
“Many believe this only affects the ‘super-rich.’ But if your property value plus your pension pot exceeds the £325,000 nil-rate band, your family will be in this net. It’s far more common than you think. This change will pull thousands of ordinary estates into the IHT bracket for the first time.”
What Are the Current IHT Rules for Pensions (Pre-April 2027)?
To understand the scale of the 2027 change, you first need to know how the rules work today.
The “Discretionary” Myth: Why Pensions Are Currently (Mostly) IHT-Free
Currently, most Defined Contribution (DC) pensions are not considered part of your estate. When you die, the pension scheme administrators or trustees typically have discretion over who receives the remaining funds.
You guide their decision by completing an “Expression of Wish” (or nomination) form. Because the decision is technically theirs, the pension pot is not legally part of your estate, and therefore no Inheritance Tax is due.
Death Before 75 vs. Death After 75: The Income Tax Rules
The only tax your beneficiaries usually need to consider today is income tax. The rules, as confirmed by providers like Royal London, are split by age.
| Member’s Age at Death | Tax Treatment for Beneficiary |
| Dies before 75 | All withdrawals (lump sum or drawdown) are completely tax-free. |
| Dies after 75 | All withdrawals are taxed at the beneficiary’s marginal income tax rate. |
The 2027 Pension Tax Shift: What Was Announced in the Autumn Budget 2024?
The new rules, set to take effect from 6 April 2027, completely upend the current system.
The Big Change: Unused Pension Funds Added to Your Estate
The core change is simple and brutal: from the 2027/28 tax year, the value of unused pension funds will be included in the calculation of your estate for Inheritance Tax purposes.
If your total estate (now including your pension) exceeds your available nil-rate bands (typically £325,000), the excess will be taxed at 40%.
Why Now? The Link Between LTA Abolition and the New IHT Charge
This H3 directly fills the “Why” content gap identified in 2.3.
This change wasn’t random. It’s the second part of a two-step move by the government.
- Step 1 (2023): The government abolished the Lifetime Allowance (LTA). This removed the cap on how much you could save in your pension without facing a major tax charge.
- Step 2 (2027): Without the LTA, pensions became an infinitely powerful IHT shelter. You could, in theory, pass on £10 million this way, tax-free. The 2027 rule change is the government’s response, closing what it now views as a loophole.
Who is Responsible? Personal Representatives (Executors) Are Now Liable
A HMRC technical consultation in 2025 confirmed a critical detail: the legal responsibility for reporting and paying the IHT will fall on the Personal Representatives (Executors) of the estate.
This places a huge new burden on executors. They will be legally liable for calculating the tax on an asset (the pension) that they may not even control, creating a complex new challenge for estate administration. [Guide to Probate]
Who Will Be Affected by the New 2027 IHT Rules?
While the rules apply to everyone, they will impact some individuals much more than others.
Are You Over the £325,000 Nil-Rate Band?
This is the key question. The government’s own estimates, published alongside the 2024 Autumn Budget, suggest around 10,500 estates will pay IHT for the first time as a direct result of this change.
Take a moment to do this simple calculation:
(Your Property Value) + (Your Savings & Investments) + (Your Unused Pension Pots) = Your New Total Estate
If that number is anywhere near £325,000 (or £650,000 for a couple), this new rule applies to you.
Good News: Exemptions for Spouses, Civil Partners & Charities
The government has confirmed that the cornerstones of IHT planning will still apply. Any assets, including pension pots, passed to a surviving spouse or civil partner will be exempt from IHT.
Likewise, any pension funds left directly to a qualifying charity will be IHT-free.
What About Defined Benefit (DB) vs. Defined Contribution (DC) Pensions?
This is a crucial distinction, and a gap in most reporting.
These new IHT rules are almost exclusively targeted at Defined Contribution (DC) or “money purchase” pots. These are the “pot of money” style pensions where you have a clear fund value.
Defined Benefit (DB), or “final salary,” schemes are generally not affected in the same way. A death benefit from a DB scheme is typically paid as a “dependant’s pension” (a guaranteed income for life for a spouse) rather than a lump sum pot, so it falls outside the scope of these new rules.
The “Double Tax” Nightmare: A Worked Example of the 2027 Rules
This is the most dangerous part of the new legislation. For anyone who dies after age 75, their beneficiaries will face a devastating “double tax” on the same pot of money.
This is not a theory. It is the direct consequence of how the two tax systems (IHT and Income Tax) will interact. Let’s look at a case study.
Case Study 1: Death in 2026 (The Old Rules)
- John dies at 80.
- His estate is already at the IHT threshold.
- He has an unused £200,000 pension pot.
- He leaves the pot to his son, who is a higher-rate (40%) taxpayer.
Calculation (Old Rules):
- IHT Paid on pension: £0
- Income Tax Paid by son (40% of £200,000): £80,000
- Total Left to Son: £120,000
Case Study 2: Death in 2028 (The New Rules)
- John dies at 80.
- His estate is at the IHT threshold.
- He has the same £200,000 pension pot.
- He leaves the pot to his same son (a 40% taxpayer).
Calculation (New Rules):
- IHT: The £200,000 pot is added to the estate and taxed at 40%: £80,000
- Pot Remaining: £200,000 – £80,000 = £120,000
- Income Tax: The son withdraws the £120,000, which is taxed at his 40% marginal rate: £48,000
- Total Left to Son: £72,000
In this scenario, the total tax paid is £128,000—an effective tax rate of 64% on the same pension pot.
Key Exceptions & Strategic Details You Can’t Miss
The 2025 technical consultations, and analysis from legal firms like Burges Salmon, have clarified some vital details that you cannot ignore.
Crucial Exception: Death-in-Service Benefits Remain IHT-Free
There is one major piece of good news. The government has explicitly confirmed that death-in-service benefits (a lump sum paid by your employer if you die while employed) will remain outside the scope of IHT.
This is a critical relief for millions of workers, as these lump sums are often substantial.
The Critical Role of Your ‘Expression of Wish’ Form
Your nomination form has just been promoted from a “nice-to-have” to a cornerstone of your estate plan.
[Advisor’s Pro-Tip]
“Your ‘Expression of Wish’ form just went from a ‘suggestion’ to a critical estate planning document. Before 2027, a sloppy form wasn’t a tax disaster. After 2027, if your form is invalid or out-of-date, it could cause legal and tax chaos for your Personal Representatives. I am advising all my clients to find, review, and resubmit theirs this year.”
What Are the New Payment Options for Beneficiaries?
HMRC’s July 2025 consultation response confirmed a new process to stop executors from being personally out of pocket.
Beneficiaries will be able to instruct the pension scheme to pay the IHT share due on the pension directly to HMRC. This avoids the nightmare scenario where an executor has to pay a £100,000 IHT bill before they can get the funds from the pension scheme.
Your 5-Point IHT Pension Review Checklist (To Do Before 2027)
This is not a “wait and see” situation. The time to prepare for the inheritance tax on pensions 2027 rules is now. Waiting until 2027 is too late.
Here is an actionable, experience-driven checklist. [Speak to a financial advisor]
1. Get an Updated Valuation of ALL Your Pensions
You must know the exact number. Call your workplace scheme, find your old private pots, and get a precise, up-to-date valuation for every single pension you hold.
2. Re-Calculate Your Total Estate Value
Use the formula: (Property) + (Savings) + (Your New Pension Total). This new number is your starting point. Does it exceed your nil-rate band?
3. Find and Review Every ‘Expression of Wish’ Form
Do you know who you nominated on your first-ever pension? Probably not. Contact every pension provider and ask for a copy. Is it the right person? Is it up to date?
4. Clarify if You Have DB or DC Schemes
Confirm in writing which of your pensions are Defined Benefit (likely safe) and which are Defined Contribution (in scope for IHT).
5. Book a Meeting to Discuss These Specific Numbers
Do not just ask an advisor “Am I affected?” Go to them with these numbers and ask: “Based on my new total estate value of £X, what is my estimated IHT liability after April 2027, and what strategies should we implement now?”
Conclusion
The 2027 rule change is a fundamental rewrite of UK estate planning. From April 2027, pensions will be included in your estate for IHT, creating a severe “double tax” risk for many.
This is the biggest change to pension estate planning in a generation. The old strategy of “die with your pension pot full” is now a potential tax trap for your family.
Don’t wait. Use our 5-Point Checklist today to start the conversation with your family and financial advisor.
FAQs
Will my pension be liable for inheritance tax in 2027?
Yes, from 6 April 2027, most unused Defined Contribution pension funds will be included in the value of your estate. They will be liable for IHT if your total estate exceeds the nil-rate bands (e.g., £325,000).
Do beneficiaries pay tax on inherited pensions after 2027?
Yes, they may pay two taxes. The pot will first be subject to IHT (40%) as part of the estate. Then, if the original owner died after 75, the beneficiary will also pay Income Tax on the money they withdraw. This is the “double tax.”
Are Defined Benefit (final salary) pensions affected by the new IHT rules?
Generally, no. These changes primarily affect Defined Contribution (money purchase) pots. Death benefits from DB schemes are typically paid as a dependant’s pension, which is not in scope.
What is the ‘double taxation’ on pensions?
This is when a single pot of money is taxed twice. First, the unused pension pot is hit with a 40% IHT charge. Then, the remaining amount is paid to a beneficiary (from a member over 75), who also pays Income Tax at their marginal rate (e.g., 40%) when they withdraw it.
How do I avoid inheritance tax on my pension after 2027?
You cannot “avoid” the rule, but you can plan for it. Strategies include ensuring your estate is below the £325,000 threshold, leaving your pension to a spouse (who is exempt), or strategically spending your pension funds first in retirement while preserving other assets like ISAs.
Does an ‘Expression of Wish’ form still matter?
It matters more than ever. It is no longer just a “suggestion” for your trustees; it is a critical document that directs a major part of your taxable estate. You must ensure it is up to date.
Who is responsible for paying the IHT on the pension pot?
The Personal Representative (Executor) of the estate is ultimately liable for reporting and paying the entire IHT bill to HMRC. However, new rules (confirmed in July 2025) will allow beneficiaries to instruct the pension scheme to pay the IHT portion from the pension fund directly to HMRC.
Do death-in-service benefits count for IHT after 2027?
No. The government has explicitly confirmed that all death-in-service benefits payable from a registered pension scheme will remain outside the scope of IHT.
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