Why your pension and estate planning may need to change in 2027

In addition to being a tax-efficient way to invest for your future, pensions have also typically served as a valuable tool for passing on wealth, as they have traditionally fallen outside the scope of Inheritance Tax (IHT).

However, one of the key announcements in last year’s Autumn Budget was that pensions will be liable for IHT from April 2027, though the full details have yet to be finalised and remain under review.

So, as pensions could potentially lose their IHT advantages in just over a year, now is a good time to revisit your estate plan in preparation for the upcoming changes.

Read on to find out more about the reforms and what they could mean for you.

Under the current rules, HMRC doesn’t typically consider pensions as part of your estate

As it stands, defined contribution (DC) pensions are not considered part of your estate and are typically exempt from IHT. Defined benefit (DB) pensions also usually fall outside the scope of IHT, though this can vary depending on the scheme and provider.

Under the current rules, if you die before you turn 75, your remaining pension pot can generally be passed on tax-free. If you die after 75, your beneficiaries may have to pay Income Tax on any withdrawals, but IHT usually still doesn’t apply.

However, these rules are set to change from 2027.

Under the proposed new system, any remaining pension you have left after you die will be considered part of your estate, which could become subject to IHT if it exceeds your nil-rate band – you can read more about this below.

Your pension provider will need to calculate and report the tax that is due. The IHT liability on your pension would then need to be paid within 60 days of your passing, and the remaining funds may not be released until the bill is settled.

The reforms are expected to affect nearly 50,000 estates

Estimates from the UK government suggest that almost 50,000 estates will be affected by the decision to bring pensions under the scope of IHT.

This figure includes 10,500 estates that will become liable for IHT for the first time, and around 38,500 that will face a higher IHT bill than they would have before.

So, with a significant number of estates likely to be affected by the changes, it’s important to start planning for IHT mitigation now.

4 ways to help mitigate Inheritance Tax on your pension

Reviewing your estate plan in preparation for the upcoming changes can help minimise your potential IHT liability and ensure your wealth is distributed according to your wishes.

Here are four steps that can help you do this.

1. Make full use of your nil-rate bands

In 2025/26, the standard nil-rate band – the threshold above which IHT is due – is £325,000. If your estate is valued higher than this, the excess may be liable for 40% IHT.

However, you can also make use of the residence nil-rate band, which allows you to pass on an additional £175,000 if you leave your main home to direct descendants.

Additionally, if you’re married or in a civil partnership, any unused nil-rate bands can be transferred to the surviving partner when one of you passes away. This allows you to jointly pass on up to £1 million before any inheritance tax IHT is due, though achieving this may require careful planning.

Making full use of these allowances can help ensure that IHT on your pension is minimised.

2. Use more of your pension while you’re alive

One of the simplest ways to limit IHT on your pension is to spend more of it while you’re alive.

Of course, you need to create an efficient and sustainable withdrawal plan, but by drawing down your pension strategically, you can reduce the size of the pot that may eventually be passed on.

You could also consider giving some of your surplus withdrawals away. This might involve gifting lump sums from your pension income, contributing to the pensions or ISAs of your loved ones, or donating to charity.

By using more of your pension while you’re alive, you can potentially minimise future IHT liabilities while making the most of your retirement income.

3. Buy an annuity

Another way to mitigate potential IHT on your pension is to buy an annuity. An annuity offers a guaranteed payment for a certain period of time or until you die, in exchange for a one-off payment.

If you buy an annuity using some of your pension pot, you could have a guaranteed income while also reducing the size of your taxable estate. However, there are some annuities that may continue to pay your beneficiaries after you die, in which case they may still be liable for IHT.

It’s also important to remember that annuities come with certain risks. For example, you might die soon after taking it out, which could mean you risk wasting a substantial amount of money because the annuity ceases at that point and there is typically no return of capital.

Moreover, buying an annuity is typically an irreversible decision, so it’s a good idea to speak to a financial planner to see if it fits into your wider plans.

4. Put life insurance in trust

You could also use some of your pension savings to take out a life insurance policy and put it in trust, which takes it outside of your estate for IHT purposes.

When you die, life insurance held in trust typically pays out IHT-free and can be used to help settle any remaining tax liabilities.

A financial planner can help you determine if this strategy is suitable for your circumstances and ensure it’s structured in the most tax-efficient way.

Get in touch

With changes to pensions and IHT expected in 2027, now is the time to start planning.

A financial planner can help you create a tax-efficient plan for drawing your retirement income and for passing on your wealth.

To speak with a financial planner, get in touch.

Email [email protected] or call us on 01625 466360.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, or trusts.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.