What the 2027 IHT change means
From 6 April 2027, the rules for passing on pensions after death will change in a way that affects many families. Under the government’s reforms, most unused pension pots and pension scheme death benefits will be brought into the scope of Inheritance Tax, IHT. This represents a major restructuring of how pensions are treated on death and removes an exemption that many individuals have relied on for long term estate planning.
Historically, unused pension funds, particularly in defined contribution schemes or arrangements where pension trustees could exercise discretion, have been treated as outside the estate for IHT. This meant that large pension pots could be passed to beneficiaries without an IHT charge, even where the remainder of the estate exceeded the nil rate band. The government believes this has created an imbalance in the system, because pensions have increasingly been viewed as vehicles for passing on wealth, rather than purely as retirement income.
The new rules aim to correct this imbalance and create a more consistent approach across all pension types.
What is changing, and who is affected
From 6 April 2027 onwards, unused pension funds and most pension death benefits will be included within a person’s estate for IHT calculations. This applies whether the benefits arise from a defined contribution plan, uncrystallised funds, unused drawdown balances or lump sums paid out following death.
There are very limited exceptions. The main excluded benefit is death in service cover that is paid from a registered pension scheme. These lump sum payments will remain outside the scope of IHT, so employees with this form of workplace protection will not see any change to the tax treatment of that particular benefit.
For most other pension pots, the value will now be treated in the same way as other assets, such as property, savings, or investments. Beneficiaries may therefore face an IHT bill where none existed before.
A key administrative point is that personal representatives, usually executors or administrators, will become responsible for reporting and paying any IHT due on pension assets. Earlier proposals suggested pension schemes might handle the payment; however, the government has confirmed that the responsibility will remain with the personal representatives. They will need to obtain valuations from pension schemes and include these figures when calculating the value of the estate.
Why the government is making this change
The government’s stated position is that pension IHT exemptions have created distortions in long term financial behaviour. Because pension assets could be passed on free of IHT, individuals could preserve pension wealth for inheritance rather than draw on it for retirement. The government believes that removing the exemption will ensure pensions are used primarily for retirement income rather than as an inheritance strategy.
In addition, there has been inconsistency in how different pensions were treated for IHT. Some older schemes or non-discretionary arrangements were already subject to IHT, while modern discretionary schemes were not. Bringing all schemes into the IHT regime creates a more even system.
What this means for estate planning and advisers
For many families, this reform will require a reassessment of retirement and estate planning decisions.
Estates that previously fell within the IHT threshold may now exceed it once pension values are included, creating an unexpected tax liability for beneficiaries. Larger estates may see a significant increase in the total IHT due.
Executors will also face new responsibilities. They will need to identify every pension scheme the deceased belonged to, request valuations, establish whether death benefits are payable and include those values within the overall estate calculation. Where beneficiaries receive pension death benefits, there may be cases in which the IHT must be paid before the benefit can be accessed, unless the scheme agrees to withhold a portion of the fund and settle the tax on behalf of the estate.
Beneficiaries will also need to understand how the change affects them. In some situations, a beneficiary may become liable for an IHT payment before receiving funds, which can create a cash flow challenge. Advisers will need to help clients plan for this possibility.
Planning considerations for pension holders
Anyone with a significant pension pot should review their estate planning. Points to consider include:
- Assessing the total value of pensions and other assets, to estimate any future IHT exposure.
• Considering whether drawing down pension funds during retirement, in a measured and tax efficient manner, would reduce the IHT burden on beneficiaries.
• Reviewing wills, trust arrangements and pension expression of wish forms to ensure they reflect current intentions.
• Exploring the use of lifetime gifts, pension contributions, charitable gifts or other estate planning tools where appropriate.
The key message is that pensions can no longer be assumed to sit outside the scope of IHT. For many individuals, particularly those with substantial defined contribution savings, early planning may avoid both tax surprises and administrative complications for loved ones.