Inheritance tax on pensions – what could the 2027 reforms mean for you and your family?
Among the sweeping tax changes announced by the Chancellor in the 2024 Budget was the decision to bring pension funds into the Inheritance Tax (IHT) net from April 2027.
Traditionally, pensions have served a dual purpose. While their primary role is to support retirement, they have also been an efficient tool for passing wealth to future generations. Current rules allow defined contribution pensions to be transferred tax-free if death occurs before age 75, or at the beneficiary’s marginal income tax rate if death occurs later. Importantly, these transfers have been outside the scope of IHT.
That landscape is now set to change. (You can read the latest from HMRC here)
Inheritance tax on pensions – how the new regime could work
From April 2027, the expectation is that pension pots and lump sum death benefits will form part of an individual’s estate for IHT purposes. The key proposals are:
- The value of a pension will be factored into IHT calculations on death.
- Transfers to a surviving spouse or civil partner will remain exempt initially, but tax could be due when the pension passes to children or other heirs.
- Where death occurs after 75, beneficiaries may face a “double charge” — income tax on withdrawals plus inheritance tax on the value of the fund.
- Personal Representatives, who are already responsible for administering the rest of the estate, will be liable for reporting and paying Inheritance Tax on any unused pension funds and death benefits from 6 April 2027 and not the pension administrators.
Adam Thompson, RPGCC’s Private Client Tax Partner added “for years pensions have been one of the most effective vehicles for intergenerational wealth planning. The decision to bring them into the inheritance tax net represents a seismic shift. Families could suddenly find themselves with significantly larger estates and potentially facing unexpected liabilities.”
Inheritance Tax on pensions – knock-on effects for Estates
The inclusion of pensions in IHT assessments has another consequence: it may strip families of the valuable Residence Nil Rate Band (RNRB). Currently, estates benefit from an additional £175,000 allowance per person (£350,000 for couples) when passing on the family home. However, the allowance tapers away for estates above £2 million.
With pension assets now pushing estates well over this threshold, many families may lose access to the RNRB entirely, worsening their tax exposure.
Matt King, Director at RPGCC Financial Services, explained “It’s easy to think of pensions purely as retirement savings, but for many people they are among their largest assets. By bringing them into the inheritance tax calculation, the Government could unintentionally penalise families who thought they were carefully planning for the future. The result may be estates tipping over £2m, and losing reliefs they had expected to rely on.”
Inheritance tax on pensions – what can families do to prepare now?
While the rules may feel daunting, there are proactive steps individuals can take to protect their legacy. At RPGCC, we are already working with clients to explore strategies such as:
- Making regular gifts from pension income – If income is not required, drawing and gifting funds can remove them from the estate immediately without triggering the seven-year rule.
- Lifetime gifting of lump sums – Larger withdrawals, whether placed into trusts or given outright, start the seven-year PET clock and can substantially reduce exposure if managed early.
- Prioritising a spouse on nominations – Leaving pensions to a surviving spouse defers the IHT liability, offering more time to plan for the next transfer of wealth.
- Considering life assurance in trust – Whole of life policies written into trust can provide a dedicated pool of funds to settle IHT, helping beneficiaries avoid the burden of finding liquidity when the estate is taxed.
- Annuitisation – Although inflexible, annuitising your pension will have the impact of reducing your estate. Where appropriate it could enable you to obtain back your RNRB if your estate is below £2m. The annuity payments can a gift out of income or be used to fund the above insurance policy.
Adam Thompson added “We are encouraging clients not to wait until 2027. Small steps now — such as reviewing nominations, drawing surplus pension income, or exploring trust structures — can have a big impact on your eventual inheritance tax bill.”
Matt King agrees, highlighting the importance of integrating tax and financial planning: “Inheritance tax on pensions is not just a tax problem — it’s a financial planning challenge. Managing pensions effectively means looking at cashflow, investment strategy and estate planning together. That’s where having both tax and financial advice under one roof at RPGCC really adds value.”
Inheritance tax on pensions – looking ahead
Though details of the reforms to inheritance tax on pensions are still being finalised, one thing is clear: the role of pensions in estate planning is changing. Families who once assumed pensions would pass smoothly to the next generation will need to revisit their strategies.
At RPGCC, our Private Client Tax and Financial Services teams are working closely with individuals and families to prepare for this shift. The earlier you take advice, the more flexibility you will have to shape your estate planning and protect your heirs from unnecessary tax burdens.
If you are concerned about how the new rules may affect you or want to review your current inheritance tax position, now is the time to act.
Contact us if you would like to arrange a free initial consultation with a member of our private client tax team, or arrange a free financial healthcheck with our financial services team.
