From April 2027, pension pots will no longer sit outside your estate for inheritance tax purposes. This is one of the most significant changes to retirement planning in a generation. If you have a defined contribution pension, SIPP, or personal pension with money left unspent at death, it will now form part of your taxable estate. Here is what is changing and what to do about it.
What Is Changing in April 2027
| Before April 2027 | From April 2027 | |
|---|---|---|
| Unspent DC pension pot | Outside estate — no IHT | Included in estate — subject to IHT |
| SIPP funds on death | Passed to beneficiaries IHT-free | Added to estate, taxed if above threshold |
| Death before 75 | Beneficiaries receive tax-free | Included in estate for IHT |
| Death after 75 | Beneficiaries pay income tax on drawdown | IHT on pot + income tax on drawdown |
The government announced this change in the October 2024 Autumn Budget, with a planned implementation date of 6 April 2027. HMRC published a consultation in 2025 on the technical details of how pension administrators will report and pay the IHT. As at April 2026, the change remains on track.
Current Inheritance Tax Thresholds (2026/27)
| Threshold | Amount |
|---|---|
| Nil rate band (NRB) — per person | £325,000 |
| Residence nil rate band (RNRB) — if home passes to direct descendants | £175,000 |
| Maximum individual threshold | £500,000 |
| Maximum couple threshold (both allowances transferable) | £1,000,000 |
| IHT rate on estate above threshold | 40% |
These thresholds have been frozen until at least April 2030.
Who Is Most at Risk
The change is most significant for:
- People with large, unspent defined contribution or SIPP pots who had planned to pass them on
- Those with total estates (including pension) above £325,000 — the nil rate band threshold
- Those who previously drew down other assets first and left the pension untouched — that strategy may no longer be optimal
- Business owners or landlords with already substantial non-pension estates where adding a pension pot tips the estate over the threshold
Worked Example: The Impact in 2027
Margaret, a 74-year-old widow, has:
- Main residence: £350,000
- ISA and savings: £100,000
- SIPP: £400,000
- Total estate: £850,000
Before April 2027:
- Pension excluded from estate
- Taxable estate: £350,000 + £100,000 = £450,000
- RNRB (home to children): £175,000 + NRB £325,000 = £500,000 threshold
- IHT: £0 (estate under combined threshold)
After April 2027:
- Pension included in estate
- Taxable estate: £350,000 + £100,000 + £400,000 = £850,000
- Threshold: £500,000
- IHT: (£850,000 − £500,000) × 40% = £140,000
The pension that was free of IHT now generates a £140,000 bill.
Strategies to Consider Before April 2027
1. Draw Down Pension Income and Move Into ISA
Withdrawing pension income and placing up to £20,000/year per person into a Stocks and Shares ISA moves money from a potential IHT environment (from April 2027) into one that is free of income tax on growth and outside the estate (ISAs are not currently included in the estate either, though rules can change).
This is particularly effective if you are not yet drawing down your pension and do not need the income.
2. Make Gifts from Pension Drawdown
Gifts to family members made more than 7 years before death are potentially exempt transfers (PETs) — they leave your estate entirely if you survive 7 years. Drawing pension income and gifting it to children or grandchildren effectively transfers value out of the IHT net over time.
Annual gift exemption: £3,000/year immediately outside the estate. Larger gifts are potentially exempt after 7 years.
3. Spend the Pension First
The current tax-planning wisdom for many retirees is: spend non-pension assets first, let the pension grow free of IHT. After April 2027, for larger estates this logic may reverse — it could make sense to spend the pension earlier and preserve other assets. Which approach is better depends on your specific estate composition.
4. Life Insurance Written in Trust
A whole-of-life insurance policy written in trust pays out on death and falls outside the estate (because it is held in trust, not owned by you). This can be used to cover an anticipated IHT bill without adding to the estate. Premiums must be manageable and the policy must remain in force.
5. Defined Benefit Pensions
If you have a defined benefit (final salary or career average) pension, the changes affect you differently. DB pensions typically pay a spouse’s pension and lump sum death benefit rather than leaving a pot. Check with your scheme trustees for guidance specific to your scheme’s death benefits.
What Has Not Changed
- IHT is still only charged on estates above £325,000 (rising to £500,000 with the RNRB and up to £1,000,000 for couples)
- Anything left to a UK-domiciled spouse or civil partner passes IHT-free regardless of value
- Charitable bequests remain IHT-free
- Business relief and agricultural relief remain in place (though at revised rates from April 2026)
The Double Tax Issue
The change creates a potential double taxation problem for beneficiaries inheriting a pension from someone who died after 75. Currently, income tax is paid on drawdown from an inherited pension. After 2027, IHT will also be paid on the pot. The pension administrator is expected to report and pay the IHT liability on the deceased’s behalf, with the net amount then available to beneficiaries — who then pay income tax on withdrawals.
The interaction of both taxes on the same pot has been the focus of HMRC’s consultation period, and the final technical rules may include some relief mechanism. Monitor HMRC’s guidance as the April 2027 date approaches.
See our inheritance tax guide, gifting property to children and IHT, and residence nil rate band explained.