Pensions and Inheritance Tax: What the April 2027 Changes Mean for Your Family

For years, pensions have been one of the most tax-efficient ways to pass wealth to the next generation. Most unused pension savings sit outside the inheritance tax (IHT) net entirely, making them a powerful estate planning tool.

That is about to change. From 6 April 2027 - exactly one year from now - most unused pension funds will be brought into the scope of inheritance tax for the first time.

How things work today

Under current rules, most defined contribution pension pots are not counted as part of your estate when you die. If you die before 75, your beneficiaries can inherit the pension completely tax-free. If you die after 75, they pay income tax on withdrawals, but there is still no inheritance tax.

Because of this, the conventional wisdom has been to spend other assets first and leave your pension untouched for as long as possible.

What is changing?

From April 2027, your unused pension savings will be added to the value of your estate alongside your property, savings, and investments when calculating IHT. If the total exceeds the nil-rate band (£325,000, or up to £500,000 with the residence nil-rate band), the excess will be taxed at 40%.

Pension funds passing to a surviving spouse or civil partner will remain exempt, as will death-in-service benefits and transfers to charity. But for anyone leaving pension wealth to children, grandchildren, or other beneficiaries, the tax position is about to get significantly worse.

The "double tax trap"

This is the part that has attracted the most attention. If you die after age 75, your unused pension could face two layers of tax: 40% IHT on the estate, then income tax (up to 45%) when your beneficiaries withdraw from the inherited pension.

The combined effective tax rate could reach 64% to 67%. For every £100,000 left in an unused pension, your family could end up receiving as little as £33,000 to £36,000.

You do not need a huge estate to be affected

Consider a fairly typical scenario for a family in Chester or Wrexham: a home worth £300,000, savings of £50,000, and a pension pot of £200,000.

Under current rules, the pension sits outside the estate, so the total for IHT purposes is £350,000 - potentially covered by the nil-rate and residence nil-rate bands.

Under the new rules, the pension is included, bringing the total to £550,000. Families who have never had to think about inheritance tax before could suddenly face a significant bill. The government estimates these changes will affect around 10,500 additional estates each year.

Five things to do this year

With 12 months until these changes take effect, there is still time to plan.

1. Update your Expression of Wish forms. Make sure your pension providers know who you would like to receive your benefits. If your spouse or civil partner is the primary beneficiary, the exemption still applies.

2. Calculate your full estate value. Add up your property, savings, investments, and pension to see whether you are likely to be above the IHT thresholds. Many people have never included their pension in this calculation before.

3. Rethink your drawdown strategy. The old logic of spending everything else first and preserving the pension is being turned on its head. For some people, it may now make more sense to draw from the pension during their lifetime and preserve other assets.

4. Consider gifting. Making gifts during your lifetime can reduce your estate over time. The seven-year rule means most gifts become fully exempt from IHT if you survive for seven years. There are also annual exemptions of £3,000 per year.

5. Get professional advice. These changes interact with pensions, investments, tax, and estate planning in complex ways. What works for one family will not work for another.

How Cummins Financial Advisers can help

At Cummins Financial Advisers, we have been helping families across Chester and Wrexham plan for the future for decades. Whether you need to review your pension nominations, rethink your drawdown strategy, or put a broader estate plan in place, we are here to help.

Get in touch today to book your estate planning review. Call us on 01244 571050 or contact us here.

The value of investments can go down as well as up, and you may get back less than the amount invested. The Financial Conduct Authority does not regulate taxation advice. Tax treatment depends on individual circumstances and may change in the future. This article is based on our understanding of the draft Finance Bill 2025-26 as at April 2026 and is for general guidance only. It does not constitute personal financial or tax advice. You should seek independent professional advice before making any decisions.