Pensions and Inheritance Tax: What is Changing in 2027?

Because pensions are not usually subject to inheritance tax, they have always played an important role in estate planning. However, this is set to change next year.

From April 2027, the government plans to bring unused pension funds and death benefits within the scope of inheritance tax. If the proposed reforms go ahead, many people will need to review their estate plans and consider whether changes are needed.

In this article, we’ll explain how rules surrounding pensions and inheritance tax are set to change and what this could mean for trust and tax planning.

How are pensions treated for inheritance tax purposes under the current rules?

So, do pensions form part of your estate?

Under current rules, no. Most private pensions are held in a trust by a pension scheme outside of the estate and are exempt from inheritance tax.

Whether a pension is passed to beneficiaries depends on the type of pension and the rules of the pension scheme.

Typically, defined contribution pensions can be passed to beneficiaries as a lump sum or as an inherited pension, while defined benefit pensions may instead pay beneficiaries a lump sum “death benefit”.

If you’re unsure how your pension scheme deals with death benefits, you can contact your pension provider to request further information.

Currently, most inherited pension pots are exempt from inheritance tax, although beneficiaries may need to pay income tax on withdrawals if the pension holder dies after the age of 75.

This has made pensions an effective estate planning tool for many families, helping them to pass on wealth to future generations tax-free. However, if the proposed changes go ahead, more inherited pension funds could become subject to inheritance tax, meaning some estate plans may no longer be as tax-efficient as they once were.

How are the pension inheritance tax rules changing from 2027?

In the October 2024 Autumn Budget, the government announced plans to bring unused pension funds and death benefits within the scope of inheritance tax from 6 April 2027.

According to the Government, the pensions and inheritance tax 2027 changes aim to stop pension schemes from being “marketed as a tax planning vehicle to transfer wealth, rather than for funding retirement”. As things stand, many people draw on their other assets first during retirement to preserve their pension for their beneficiaries.

Under the proposed rules, the executor or administrator would be responsible for locating pension savings, calculating their value, and paying any inheritance tax due on pensions. This tax would generally need to be paid within six months of the person passing away.

For some families, this could result in a higher inheritance tax liability than expected, reducing the amount of wealth passed onto loved ones.

It is expected that those who are married or in a civil partnership will still be able to transfer their remaining tax-free allowance. Most “death in service” benefits, joint life annuities, and dependents’ scheme pensions are also expected to remain exempt from IHT.

It’s important to note that the proposed new rules are still developing and could change further before they come into effect in April 2027.

What could the pension inheritance tax changes mean for your estate plan?

With the proposed inheritance tax pension changes still some time away, now is a good time to revisit your estate planning strategy to determine if and how the changes could affect you.

If the value of your estate, including your pension fund, is below the inheritance tax threshold, then it is unlikely that the changes will have any effect on you.

However, those with larger estates or substantial pension pots whose estate plans relied on pensions being outside the estate should consider reviewing them with a solicitor to determine whether they will still help them meet their goals, or whether there is a more tax-efficient way to proceed.

Can you still choose who inherits your pension?

Yes, the proposed changes will not change your ability to nominate who you want to receive your pension after your death.

Most pension schemes allow you to nominate your beneficiaries using an Expression of Wish form. It’s important to note that the pension scheme administrators still have discretion over how the pension is distributed – but in most cases, they will honour the deceased’s wishes.

Just like with your estate plan, it’s very important to review your pension arrangements after significant life events, like marriage, divorce, or the birth of a child, to make sure that they still reflect your wishes.

Review your estate plan with Hibberts Solicitors

Do you understand how the proposed inheritance tax changes could impact your estate plan? If your current arrangements were created with the assumption that your pension sits outside of your estate, the changes could significantly impact how much your beneficiaries inherit after your death.

Whether you need help creating a will, reviewing an existing plan, or understanding how the proposed changes may impact your plan, Hibberts Solicitors is here to help.

Contact our team of wills and probate solicitors in Cheshire by calling 01270 624 225 or emailing enquiries@hibberts.com for help protecting your family and preserving your legacy.