From 6 April 2027, most unused pension funds will be included in the value of a person’s estate for inheritance tax purposes. This reverses a position that has held since 2015, when pension flexibilities turned pensions into one of the most tax-efficient vehicles for passing wealth between generations. The received wisdom of the last decade, spend the ISA first, leave the pension untouched, has now inverted. For anyone with significant pension wealth, the twelve months between now and April 2027 is a planning window. Not a panic window.
For the past decade, pensions have quietly become the most powerful estate-planning tool in the UK tax system.
Not because they were designed for that purpose, they were not. But because a combination of the pension flexibilities introduced in 2015 and the existing IHT treatment created a gap that was too useful to ignore. You could save into a pension, benefit from tax relief on the way in and tax-free growth while invested, draw only what you needed for retirement, and leave the rest to your children entirely outside the IHT net. The pension, in effect, became the last thing you spent, because it was the most tax-efficient thing to pass on.
That era ends on 6 April 2027.
What is actually changing
From April 2027, most unused pension funds and lump-sum death benefits will be included in the value of a person’s estate for inheritance tax purposes. The legislation, confirmed in the Finance Act 2026 following a technical consultation published in July 2025, applies regardless of whether the pension scheme is discretionary or non-discretionary.
The practical effect is that a pension pot left untouched on death will now form part of the estate and, if the estate exceeds the available IHT thresholds, will attract inheritance tax at 40%.
What is included: unused defined contribution (DC) pension funds, unused defined benefit (DB) lump-sum death benefits, pension death benefits paid to anyone other than a spouse, civil partner, or charity.
What is excluded: death-in-service benefits paid from a registered pension scheme (these remain outside IHT), dependants’ scheme pensions from defined benefit arrangements, and benefits paid to a surviving spouse or civil partner (which remain exempt under the spousal exemption).
Who is responsible: personal representatives, the executors or administrators of the estate, will be responsible for reporting and paying any IHT due on the pension element. This is a change from the original proposal, which placed the responsibility on pension scheme administrators. A new mechanism will allow personal representatives to instruct scheme administrators to withhold up to 50% of taxable benefits for up to 15 months after death to meet the IHT liability.
How many people are affected
The Government’s own estimates, published by HMRC in the November 2025 technical consultation response, suggest that of approximately 213,000 estates with inheritable pension wealth in 2027/28, around 10,500 will have a new IHT liability where previously they would not, and around 38,500 will pay more than under current rules. The average additional IHT bill is estimated at approximately £34,000 per affected estate.
These are static estimates, they do not account for behavioural changes such as people drawing down faster or restructuring their estate plans. The actual numbers will depend on how people respond.
The double-taxation problem nobody is talking about enough
This is the part that deserves more attention than it typically receives.
When a pension beneficiary inherits unused pension funds, they pay income tax on the withdrawals, at their marginal rate. If the member died after age 75 (which is the majority of cases), the beneficiary pays income tax at 20%, 40%, or 45% depending on their own tax band.
From April 2027, the same funds will also have been subject to inheritance tax at 40% as part of the estate.
The combined effective tax rate can reach 64% to 67%, or even higher where the pension’s inclusion in the estate triggers the loss of the Residence Nil-Rate Band (RNRB), which tapers away for estates above £2 million. In extreme cases, Womble Bond Dickinson, the law firm specialising in estate planning, have noted that the effective combined rate could exceed 70%.
This is not a niche concern. It applies to anyone whose estate, including the pension, exceeds the available nil-rate bands and whose beneficiaries are higher or additional rate taxpayers.
Why “spend the ISA, leave the pension” has inverted
The spending order, the question of which assets to draw first in retirement, has been one of the most consequential planning decisions for the past decade. The standard answer, for most clients with both ISA and pension wealth, has been clear: spend the ISA first, because ISA funds form part of the estate for IHT while pension funds do not.
From April 2027, that logic no longer holds. The pension will be included in the estate alongside the ISA. The question of which to draw first now depends on a different set of variables, income tax efficiency of drawdown, the marginal IHT rate on each asset class, the client’s health and life expectancy, the tax position of their beneficiaries, and the overall estate structure.
There is no single new “right answer.” The right answer is individual and depends on the whole picture.
What this means for specific groups
Dentists with large DC pension pots alongside NHS defined benefit pensions. This group is disproportionately affected. A dentist who has spent decades maximising personal and employer contributions into a private DC pension, while also accruing an NHS pension, may have combined pension wealth of £1 million or more, all of which, from April 2027, counts toward the estate. The NHS pension’s lump-sum death benefits are included; the dependant’s pension paid to a surviving spouse is not.
Business owners who maximised employer contributions. Owner-directors who used employer pension contributions as a tax-efficient extraction route, a strategy encouraged by the tax system for years, may now find that the wealth accumulated inside the pension is less tax-efficient to pass on than they expected. The planning conversation shifts from “how much can we put into the pension?” to “how much should we leave in the pension?”
Senior executives with multiple pension pots. The scattered portfolio problem, seven pensions from seven employers, becomes an IHT problem as well as an efficiency problem. Knowing the total value across all schemes is the first step toward modelling the estate position.
Farming families. The combination of the BPR/APR cap (from April 2026) and pension inclusion in the estate (from April 2027) creates a compounding planning challenge. Assets that were previously entirely outside IHT on two separate grounds, business relief and pension exemption, are now within scope on both.
The twelve-month planning window
The temptation is to read a change like this and feel that something dramatic must happen immediately. For most people, it needn’t.
What should happen is a calm, structured review of the estate position, including pension wealth, to understand the likely IHT exposure under the new rules and to consider whether any adjustments to the plan are appropriate.
Review the estate valuation with pensions included. This is the foundation. Most people have a rough sense of their estate value excluding pensions. Adding the pension changes the number materially, and may push the estate above key thresholds, including the £2 million RNRB taper.
Revisit the spending order. The “spend the ISA, leave the pension” default may no longer be optimal. The right drawdown sequence now depends on a wider set of variables and should be modelled using cashflow tools.
Consider the drawdown strategy. Drawing more from the pension during retirement reduces the estate value on death. This does not mean rushing to empty the pension, that would trigger unnecessary income tax. It means modelling the optimal rate of drawdown that balances income tax, IHT, and lifestyle needs.
Review beneficiary nominations. Pension beneficiary nominations should reflect the new IHT landscape. Leaving the pension to a spouse remains IHT-exempt. Leaving it to children creates a potential IHT charge that was not there before.
Consider gifting from surplus income. If pension drawdown creates income that exceeds living costs, the excess can potentially be gifted using the normal expenditure out of income IHT exemption, one of the most powerful and underused reliefs available. We’ll cover this in detail in a future post.
Model the impact of life insurance. A whole-of-life policy, written in trust, can fund the IHT liability without requiring assets to be sold. The cost of the policy should be weighed against the tax saved.
Don’t rush. There are twelve months before the change takes effect. Planning decisions made in haste, particularly around pension drawdown and gifting, can produce worse outcomes than doing nothing. The window is for thinking, not for panicking.
The question underneath the question
There is a deeper shift embedded in this change that is worth naming.
For the past decade, the planning orthodoxy was to preserve the pension. The pension was the last thing you touched, the most tax-efficient asset in the estate, the vehicle that made intergenerational wealth transfer genuinely effective.
From April 2027, the pension is no longer a parking spot for wealth you don’t want to spend. It becomes an asset like any other, subject to IHT, subject to the spending order, subject to planning.
Which means the conversation about what pensions are for has changed. The pension is, once again, a retirement income tool first and an estate-planning vehicle second. The Government has said as much explicitly: the policy is intended to discourage the use of pensions as a wealth transfer mechanism and to encourage them being used for their original purpose, funding retirement.
For financial planning, this is a meaningful reframe. The plan is no longer designed to protect the pension from being spent. The plan is designed to ensure the pension is spent well, on a retirement that sustains, not one that rations.
The question is not how to avoid the tax. The question is how to live well, plan honestly, and leave what remains in the most efficient structure possible.
That has always been the question. It’s just clearer now.
Start the conversation
If your estate, including pension wealth, may be affected by the April 2027 changes, we’d be glad to talk through what the numbers look like in your specific circumstances.
Frequently asked questions
When do pensions become subject to inheritance tax? From 6 April 2027, most unused pension funds and lump-sum death benefits will be included in the value of a person’s estate for inheritance tax purposes. This applies to both defined contribution and defined benefit schemes, with specific exclusions for death-in-service benefits, dependants’ scheme pensions, and benefits paid to a surviving spouse, civil partner, or charity.
How much extra IHT will people pay? HMRC estimates that approximately 10,500 estates will have a new IHT liability where previously they would not, and around 38,500 estates will pay more than under current rules. The average additional IHT bill is estimated at approximately £34,000 per affected estate. These are static estimates and do not account for behavioural changes in response to the policy.
Can I still leave my pension to my spouse tax-free? Yes. Pension death benefits paid to a surviving spouse or civil partner remain exempt from inheritance tax under the spousal exemption. The IHT charge applies to benefits paid to anyone other than a spouse, civil partner, or qualifying charity.
What is the combined tax rate on inherited pensions? Pension beneficiaries pay income tax on withdrawals at their marginal rate (20%, 40%, or 45%). From April 2027, the same funds may also be subject to IHT at 40% as part of the estate. The combined effective tax rate can reach 64% to 67%, or higher in cases where the pension’s inclusion triggers the loss of the Residence Nil-Rate Band. Womble Bond Dickinson, in their February 2026 analysis, have noted effective combined rates exceeding 70% in some scenarios.
Should I spend my pension down faster to avoid IHT? Not necessarily. Drawing more from the pension does reduce the estate for IHT purposes, but it also triggers income tax at the member’s marginal rate. The optimal drawdown rate depends on the balance between income tax, IHT, lifestyle needs, and the overall estate structure. Rushing to empty a pension to avoid IHT can produce a worse outcome than a planned approach. This should be modelled with a financial planner.
What is the normal expenditure out of income exemption? The normal expenditure out of income exemption allows regular gifts made from surplus income, income that exceeds your normal living costs, to be immediately exempt from IHT, with no seven-year waiting period. If pension drawdown creates income above what is needed for living costs, the excess may qualify for this exemption if gifted regularly and as part of a pattern. We’ll be covering this in a dedicated post.
Tax rules, rates, and allowances referenced in this article are based on the position as at April 2026, with changes taking effect from 6 April 2027 as legislated in the Finance Act 2026. Tax treatment depends on individual circumstances, pension type, estate value, family structure, and the interaction between multiple reliefs and thresholds. The double-taxation scenario described involves the interaction of income tax and inheritance tax, both of which depend on individual circumstances. This article is for general information only and does not constitute personal advice. Your own circumstances should be reviewed with a qualified financial planner before acting on any of the points discussed. Juniper Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (FCA Firm Reference 973711).
