Upcoming Changes to Pensions and Inheritance Tax
Starting from 6 April 2027, unused pension funds and death benefits will generally be included in an individual’s estate for inheritance tax (IHT) purposes. As a result, if the total value of the estate exceeds the IHT threshold, these pension assets may become subject to tax upon death.
The current pension rules
At present, undrawn discretionary pension funds are not included in the deceased’s estate for Inheritance Tax (IHT) purposes. Pension holders can nominate beneficiaries to receive these undrawn funds after their death.
Importantly, these funds can be passed on free of inheritance tax, making pensions a tax-efficient way to transfer wealth.
The upcoming changes to pensions and Inheritance Tax
Under the new rules taking effect from 6 April 2027, undrawn pension funds will become part of the taxable estate for IHT purposes.
Key implications include:
- Increased tax liability: The change will likely increase the number of estates exceeding the IHT threshold, leading to higher tax revenue for the government.
- Reduced availability of the Residence Nil Rate Band (RNRB): More estates will surpass the frozen £2 million RNRB taper threshold, limiting access to this valuable allowance.
- Lower liquidity for paying IHT: As more pension funds are taxed, there may be fewer readily available assets to cover the IHT bill before probate is granted.
Previously, if was popular was to draw from other assets first and preserve pension pots, which could then be passed on free of IHT to non-exempt beneficiaries (such as adult children).
Age rules remain in place
When you die affects income tax on your pension. If you die before the age of 75, the pension can pass free of income tax to your beneficiaries. If you die after the age of 75, the beneficiaries are taxed at their individual rate of income tax on funds they receive.
As a result of the changes to pensions and Inheritance Tax rules from 6 April 2027, beneficiaries could pay both income tax and Inheritance Tax on inherited pensions if you die after the age of 75.
What should you do about the pension changes?
Estates where the pension holder dies before 6 April 2027 will still benefit from the current rules. After this date, unused pension funds and death benefits will form part of the estate for IHT.
Although no immediate action may be required, it would be prudent to review pension beneficiary nominations and plan for the upcoming changes. Passing assets to spouses or civil partners, who typically qualify for IHT exemptions, may become more popular instead of passing assets directly to children or other non-exempt individuals.
The first step is to review your financial plan with your financial advisor and involve your solicitor so that your estate plan is up to date and takes account of incoming changes to pensions.
The Government’s Consultation and more in depth commentary is available on the government website.
This article does not constitute legal advice and we recommend you take professional advice before taking any action
How we can help
Our solicitors specialise in advising on Inheritance Tax and often work closely with other professionals such as financial advisors. To book a free initial consultation, please call us on 01260 769 639. We offer appointments at our Congleton office or in your own home. Alternatively, meetings can be carried out online (e.g. via Teams).
Our solicitors will be happy to advise you on your options regarding Inheritance tax and Estate planning.
Melissa Howman
Melissa is a Solicitor at Spall Clark Solicitors and has worked in the legal profession for over 11 years. Melissa has specialised predominantly in Private Client over the past 5 years and is planning to work towards being a full member of STEP in the near future. She is also a Dementia Friend with the Alzheimer’s Society.
Natasha Yelland
Natasha is a Solicitor at Spall Clark Solicitors and an affiliate member of STEP. She has been working within the legal profession for over 4 years with a specific focus in Private Client.
Natasha was shortlisted as a Finalist for the Rising Star (Legal) Award at the STEP Private Client Awards 2025 and was also shortlisted for the One to Watch Practitioner of the Year Award at the British Wills and Probate Awards 2025.
