Pensions and Inheritance Tax Changes from April 2027

Pensions and Inheritance Tax Changes from April 2027: A Practical Guide

For many years, pensions have been one of the most tax-efficient ways to pass wealth to the next generation. Unlike most other assets, pension funds have typically sat outside an individual’s estate for inheritance tax (IHT) purposes.

However, from 6 April 2027, this position is set to change.

Under new Government legislation, most unused pension funds will be brought within the scope of inheritance tax on death. This represents a significant shift in estate planning and could result in many more families facing unexpected tax liabilities.

For individuals and families across Cheltenham, Gloucestershire and the wider UK, this change could fundamentally alter how estates are structured.

In this guide, we explain what is changing, how it could affect you, and what practical steps you should consider now.

What Are the Pension Inheritance Tax Changes Coming in April 2027?

From April 2027, most unused pension funds will be included within an individual’s estate for inheritance tax purposes.

Previously, pensions were often used as a tax-efficient way to pass on wealth. This change means that pension savings could now be subject to IHT at 40%, significantly increasing the taxable value of an estate.

Understanding Current Inheritance Tax Thresholds (NRB and RNRB)

Currently, inheritance tax allowances include:

• The nil-rate band (NRB) of £325,000 (unchanged since 2009)
• The residence nil-rate band (RNRB) of £175,000

The RNRB typically applies where a main residence is passed to children or grandchildren.

Both allowances are transferable between spouses and civil partners, meaning a couple may benefit from up to £1 million in combined allowances.

However, the RNRB is reduced where an estate exceeds £2 million. For every £2 above this threshold, £1 of the RNRB is lost. Once an estate exceeds:

• £2,350,000 (individual), or
• £2,700,000 (couple),

the RNRB is lost entirely.

How the 2027 Changes Could Increase Your Estate’s IHT Liability

For individuals with substantial pension savings, this change could bring estates that were previously below the IHT threshold into charge.

For example, a couple whose estate (excluding pensions) fell within their combined allowances may now exceed those thresholds once pension funds are included—potentially resulting in a 40% tax charge on the excess.

Will Pension Beneficiaries Pay Both Inheritance Tax and Income Tax?

Yes, in some cases.

If the pension holder dies:

• Before age 75: beneficiaries can usually access pension funds free of income tax (but not IHT from 2027).
• After age 75: withdrawals are taxed at the beneficiary’s marginal income tax rate.

This creates a potential “double taxation” scenario:

• 40% inheritance tax on the fund, followed by
• Income tax (up to 45%) on withdrawals

This can significantly reduce the value ultimately received by beneficiaries.

What Is Beneficiary Flex-Access Drawdown (BFAD) and Why It Matters

If a pension does not offer a Beneficiary Flex-Access Drawdown (BFAD) facility, beneficiaries may be forced to withdraw the entire pension as a lump sum.

This could trigger:

• An immediate inheritance tax liability; and
• A large income tax charge in a single tax year

Having access to BFAD allows beneficiaries to draw funds more flexibly, which can help manage and mitigate overall tax exposure.

What Should You Be Doing Now to Protect Your Estate?

Pensions remain a valuable financial planning tool, offering income tax relief, tax-efficient growth and retirement income. However, early planning is now essential.

1. Review and Update Your Pension Nomination (Expression of Wishes)

Ensure your nomination forms are up to date, particularly after major life events such as marriage, divorce or the birth of children.

Your pension nominations should align with your Will and wider estate planning. A coordinated approach between your solicitor and financial adviser is key.

2. Consider Consolidating Your Pension Arrangements

Bringing pensions together (where appropriate) can reduce complexity and make administration easier for your executors.

At the very least, ensure clear records of all pension arrangements are maintained.

3. Check for Beneficiary Flex-Access Drawdown Options

Confirm whether your pension includes a BFAD facility.

If not, it may be worth discussing with a regulated financial adviser whether transferring to a more flexible arrangement would be beneficial.

4. Rethink Your Retirement and Withdrawal Strategy

Some individuals may wish to:

• Draw tax-free lump sums earlier;
• Use pension income sooner; or
• Preserve other assets such as ISAs

Affordability is key, and financial advice should always be taken before making changes.

5. Start Early Inheritance Tax Planning

Lifetime gifting may become more relevant.

Gifts can fall outside your estate if you survive seven years, but careful planning is required to avoid unintended tax consequences.

6. Consider Marriage or Civil Partnership for Tax Efficiency

Transfers between spouses and civil partners are generally exempt from IHT.

Formalising a relationship may therefore provide significant tax advantages—but legal advice should be taken, particularly regarding Wills and pre-nuptial agreements.

7. Using Charitable Giving to Reduce Inheritance Tax

Leaving part of your estate to charity can reduce the overall rate of IHT from 40% to 36%, provided certain conditions are met.

8. Review Business and Agricultural Assets Held in Pensions

HMRC has confirmed that business and agricultural assets held within pensions will still be treated as pension assets and therefore subject to IHT.

This is a complex area and specialist advice is essential.

FAQs: Pension Inheritance Tax Changes

Will pensions be subject to inheritance tax from 2027?
Yes, from April 2027 most unused pension funds will be included within an estate for IHT purposes.

Do beneficiaries pay tax on inherited pensions?
Potentially both inheritance tax and income tax, depending on the age at death and how funds are withdrawn.

Should I withdraw my pension early to avoid IHT?
Not necessarily—this depends on your wider financial position. Professional advice is essential.

What happens if I die before age 75?
Pension funds are usually income tax-free for beneficiaries but may still be subject to inheritance tax under the new rules.

How We Can Help with Pension and Inheritance Tax Planning

The upcoming pension inheritance tax changes represent one of the most significant shifts in estate planning in recent years.

Taking action now can make a meaningful difference to how much of your estate is preserved for your family.

Our Cheltenham-based Private Client team supports clients across Gloucestershire and the wider UK, helping with:

• inheritance tax planning and mitigation strategies;

• reviewing Wills in light of pension changes; and

• working alongside financial advisers to ensure a fully coordinated approach.

If you would like tailored advice on how the 2027 pension inheritance tax changes may affect you, please get in touch with our team on 01242 574 244 and ask to speak to the Private Client Team.