Inheritance tax and pensions: what the proposed 2027 changes could mean for you

From 6 April 2027, unused pension funds and death benefits will be included in your estate for IHT purposes. This means that money held in pensions—previously considered outside the scope of IHT—could now be taxed at up to 40%, depending on the size of your estate and who inherits the funds.

This article provides a general overview of the potential impact of proposed changes to UK tax rules. It is not intended as personal tax advice. We recommend seeking financial advice from a qualified tax specialist, alongside advice from an SPW adviser, to understand how these changes may affect your individual circumstances. We explain more about how we work together with our professional partnerships to deliver comprehensive holistic advice later in this article. 

Under current legislation, pension assets are generally excluded from your estate for IHT purposes. Also, in most cases, if the pension holder passes away before age 75, beneficiaries can access the inherited pension without paying income tax on withdrawals from the pension. If death occurs after the age of 75, beneficiaries may be subject to income tax at their marginal rate (marginal rate means the rate of tax they pay on their next pound of income, based on their overall earnings) on withdrawals on the pension. For higher earners, this could be 40% or more.

This favourable treatment has led many to preserve pension savings for inheritance, funding retirement from other sources such as Individual Savings Accounts (ISAs) or general savings. But the new rules may change that equation.

From 6 April 2027, pension funds will be treated like other assets forming part of the value of your estate for IHT purposes. If your estate exceeds the IHT threshold (currently £325,000 for an individual), those pension funds could be subject to IHT. 

However, if you are passing on a qualifying residential property to direct descendants (such as children or grandchildren), your estate may also benefit from the Residence Nil Rate Band (RNRB), currently up to £175,000. This could increase the total tax-free allowance to £500,000 for an individual or up to £1 million for a married couple or civil partners, assuming both nil rate bands are available and unused. But it’s important to note that the RNRB tapers for estates valued over £2 million and is lost entirely at £2.35 million. Including pension assets in the estate could push some estates over this threshold, potentially reducing or eliminating the RNRB and increasing the overall IHT liability.

One of the key concerns raised by the proposed reform is the potential for double taxation. This is where pension savings could be subject to both inheritance and income tax. This may occur if a pension is inherited following the death of the pension holder aged over 75, with beneficiaries potentially paying income tax when drawing from the inherited pension that may already have been subject to IHT.

Here’s how it could play out:

• Scenario: John, a widower, dies in 2027 aged 78. He has a defined contribution pension pot worth £100,000, other assets worth £900,000, and a main residence valued at £400,000. He leaves his entire estate to his adult children.
• Estate value: £1.4 million, which includes the pension (now counted for IHT purposes).
• IHT thresholds: John qualifies for the standard nil-rate band (£325,000) and the residence nil-rate band (£175,000), as he is passing on his home to direct descendants. His total IHT-free allowance is £500,000.
• Taxable estate: £900,000 (i.e. £1.4 million minus £500,000).
• IHT liability: 40% of £900,000 = £360,000. Assuming the pension is proportionally taxed, £40,000 of IHT applies to the pension pot, reducing it to £60,000.
• Income tax: Because John died after age 75, his children will pay income tax on withdrawals from the inherited pension. If they are higher-rate taxpayers (40%), the remaining £60,000 could be reduced to £36,000 after income tax.
• Effective tax rate: £64,000 lost to tax on a £100,000 pension = 64% effective tax rate. 

This scenario highlights some important considerations for individuals who have followed long-standing guidance around preserving pension wealth for future generations. It also reinforces the value of thoughtful planning to help mitigate value eroded by tax.

The government estimates that 10,500 more estates will pay IHT annually as a result of this change, raising £1.46 billion a year by 2030. That’s a significant increase from the 27,800 estates that paid IHT in 2021–22.

If you’ve structured your retirement income to preserve pension wealth for inheritance, now is the time to revisit that plan. You may need to rethink how and when you draw income, and whether other assets, like ISAs or property, should play a bigger role.

The inclusion of pensions in IHT calculations could also push more estates over the £2 million threshold, where the residence nil-rate band begins to taper. This could reduce the additional £175,000 IHT allowance available for passing on a qualifying residence, further increasing the tax burden.

There remain ways to potentially reduce your IHT liability and specialist tax advice should be sought. These include:

• Gifting: Use annual allowances, wedding gifts, and regular income gifts to reduce your taxable estate.
• Estate planning: Review how your assets are structured and explore trusts or other vehicles.
• Income strategy: Reassess your drawdown approach to ensure it remains tax-efficient under the new rules.

At SPW, we believe financial planning should be proactive, not reactive. By reviewing your estate and retirement strategy today, you could help ensure that your wealth is protected and passed on in the most efficient way possible.

Speak to an SPW adviser today to explore your options and build a plan that works for you and your family. 

We’re here to help you stay ahead of change and make confident decisions about your financial future. 

Tax legislation including allowances that may change: The information provided reflects current legislation and proposals as of the date of publication. Future changes could affect the accuracy or relevance of this content.

Tax treatment depends on individual circumstances: How tax rules apply will vary depending on your personal situation, including income level, estate size, and beneficiary status. We recommend seeking formal advice from a qualified tax specialist, alongside advice from your SPW adviser.

This article is for general information only: It is not intended to provide personalised financial, investment, or tax advice. No action should be taken based solely on the content of this article.

Pensions and estate planning involve complex considerations: Decisions around pension drawdown and gifting, should be made with professional advice to ensure they align with your financial goals and legal obligations.

The value of investments can go down as well as up: Past performance is not a reliable indicator of future results. You may not get back the amount originally invested.

SPW fees and charges apply: These will depend on the services you use and will be clearly explained by your adviser.

The different scenarios discussed are examples and what is right for each person will depend on their individual circumstances. 

In this article we refer to the tax rate and thresholds set for England and Northern Ireland, these may differ for the devolved nations of Scotland and Wales.

Schroders Personal Wealth does not provide personal l tax advisory and tax compliance, estate planning and administration, trust creation and management or will writing, however we can introduce you to a relevant specialist.  Schroders Personal Wealth might receive a referral fee from some of the partners we introduce to you.