In the Budget of 30 October 2024, the Chancellor announced that from 6 April 2027, most unused pension funds will be included as part of your estate when calculating Inheritance Tax (IHT). The Finance Act 2026 received Royal Assent on 18 March 2026 — this is no longer a proposal, it is law and with just over six months until the rules change, the time to review your planning is now.
At the moment, when you pass away, any money left in your pension can usually be passed on to your beneficiaries outside of your estate. That means it’s typically not counted for IHT purposes, and often it’s tax-free if you die before 75. If you die after 75, it’s taxed at your beneficiary’s marginal rate.
It’s worth noting that pension benefits on death are subject to the Lump Sum and Death Benefit Allowance which caps the total amount of tax free lump sums to £1,073,100 and the payment must be made within 2 years of the scheme administrator becoming aware of the death.
From 6 April 2027, this changes. Your remaining pension pot will be counted in full as part of your estate. That could push your estate over the IHT threshold, triggering a potential 40% tax charge on everything above your available allowances.
It’s also worth noting that:
HMRC will value the pension pot at the date of death
if the value falls between death and the point at which the money is actually paid out, there is no adjustment for that drop. The tax will still be based on the original figure.
Certain reliefs will not apply
because pension funds aren’t treated as an asset you personally own, Business Relief and Agricultural Relief cannot be used to reduce IHT on pension savings.
Since “A-Day” in 2006, pensions have undergone several rounds of changes, with a major simplification in 2015 known as Pension Freedoms. These gave people greater control over how they access and pass on their pension pots. For many, that meant using ISAs or other savings first and leaving pensions until last because they were more tax-efficient.
Now, with pensions forming part of your estate from April 2027, that strategy may need to change — and the clock is ticking.
We all have a Nil Rate Band (NRB) of £325,000 that can be left with no Inheritance Tax to anyone. If you are married or in a civil partnership and leave everything to your spouse or civil partner, there is no IHT to pay, no matter how large the estate.
If you are passing on your main residence to direct descendants (children, stepchildren or grandchildren), there is a further £175,000 available free of Inheritance Tax known as the Residence Nil Rate Band (RNRB). For estates valued over £2m this additional RNRB is reduced or “tapered” away by £1 for every £2 over the £2m mark to zero.
Unmarried couples: If a couple live together but aren’t married or in a civil partnership, the same rules do not apply. The NRB and the RNRB cannot be transferred to the surviving partner if they are unused. This means couples who live together are unable to pass on assets to each other free of IHT when they die. When the first partner dies, there is only £325,000 available before IHT is due rather than an unlimited amount.
The addition of unspent pension funds could change an estate’s Inheritance Tax calculation substantially. This is not simply a 40% additional charge to pension funds — other aspects of your estate planning are likely to be impacted.
Since 2015 it has been common to spend other assets first, for example ISAs, leaving pension funds until later. When married couples or civil partners have more than sufficient pensions, they often look to “bypass” each other and leave their unspent pension funds to children or grandchildren through an “expression of wish.”
Take a married couple:
| Asset | Value |
| House | £750,000 |
| Savings & Investments | £250,000 |
| Pension pots (£850,000 each) | £1,700,000 |
| Total Estate | £2,700,000 |
Before April 2027 — when both have died, i.e. on the second death, no IHT would be payable.
After April 2027 — the estate for IHT increases to £2.7m on the second death. As the estate is over £2m, the RNRB has tapered away and only the standard NRBs remain. Only £650,000 is free of IHT — and the liability rises from zero to £820,000.
The figures assume on the first death everything is left to the spouse, and on the second death the estate goes to children/grandchildren. The available nil rate bands and residence nil rate bands are transferred on first death, the home qualifies for the residence nil rate band, the assets ultimately pass to direct descendants and there are no lifetime gifts, debts or other adjustments.
Tapered RNRB: The RNRB reduces by £1 for every £2 over the £2m taper threshold.
Any tax due under the normal pension rules will be levied on the residual amount after IHT has been paid by the personal administrators.
Now take an unmarried couple, both age 45:
| Asset – All owned by the deceased | Value |
| House | £300,000 |
| Savings | £25,000 |
| Pension | £100,000 |
| Total | £425,000 |
Before April 2027 — the estate is valued at £325,000 (house plus savings). The pension of £100,000 sits outside the estate and is nominated to partner. The full £325,000 is covered by the Nil Rate Band. IHT due: £0. The partner receives £425,000.
After April 2027 — the pension is now included, bringing the total estate for IHT purposes to £425,000. After deducting the NRB of £325,000, the taxable amount is £100,000. IHT at 40% means the liability rises from zero to £40,000 — and the partner receives £385,000 instead of the full £425,000.
Unmarried couples cannot transfer unused NRB or RNRB to each other, and there is no spouse exemption — so IHT applies on the first death.
With just under six months until these changes take effect, now is a good moment to review. Good estate planning takes time — reviewing your pensions, updating your Will, reconsidering nomination forms, and potentially restructuring how you draw income all require careful thought and professional advice. There is plenty of time to put in place any plans if needed. There is no need to rush these decisions before April 2027.
Review your investments, pensions and other assets and seek advice about how to draw these and the tax implications of doing so.
Reconsider your nomination forms — because the most tax-efficient choice now depends on the whole estate. Although leaving pension funds to your spouse (no IHT between spouses) rather than directly to children or grandchildren may generally defer rather than remove IHT totally.
Ensure your Will is up to date ensure it reflects your current wishes and accounts for the new rules.
Understand ownership do jointly owned assets automatically pass to the survivor? What happens to each asset on death?
Independent advice in these matters is crucial. April 2027 will arrive sooner than you think — and once it does, the rules apply whether you’ve planned for them or not.
Inadvertently, the inherited wealth may increase the survivor’s estate and create or enlarge an IHT exposure on the second death. What’s best for you will depend upon their residence status, family objectives, access needs and the availability of allowances.
At Forward Plan we look at what is important to you and your family, what your money means for you and your family, now and after death. We will look at whether you would like to consider gifting, and how much during your lifetime.
Forward Plan is here to help… we do what we say in our name.
Please be aware that the impact of taxation (and any tax reliefs) depends on individual circumstances. The Financial Conduct Authority does not regulate taxation and trust advice. Information about tax rules is based upon our current understanding and is liable to change in the future.
For more information on Pensions and Inheritance Tax, contact Forward Plan to book your free no obligation consultation to improve your financial health please contact us through the website or call us on: 01303 76 76 50
