Last updated: August 2025.
What is the April 2027 pension IHT change?
In October 2024, the UK Government announced that from April 2027, unused pension funds, including defined contribution pensions and any death benefits, will be included in the value of a deceased person's estate for Inheritance Tax purposes.
Until April 2027, most pensions sit outside the IHT net entirely. They have been one of the most efficient ways to pass wealth to the next generation: free of IHT, and (if the pension holder died before age 75) free of income tax when drawn by beneficiaries.
From April 2027, this changes fundamentally. Pensions move into the standard IHT framework, joining the rest of the estate.
At a glance: what is changing
| Scenario | Now (until April 2027) | From April 2027 |
|---|---|---|
| Death before age 75, IHT on pension | No | Yes (40% above nil-rate bands) |
| Death before age 75, beneficiary income tax | No | No (still tax-free withdrawals) |
| Death at or after age 75, IHT on pension | No | Yes (40% above nil-rate bands) |
| Death at or after age 75, beneficiary income tax | Yes (at beneficiary's marginal rate) | Yes (at beneficiary's marginal rate) |
For the post-75 case, the combination of 40% IHT followed by income tax of up to 45% on withdrawals can produce an effective tax charge of around 64%, or more in some circumstances.
Why does this matter?
For many years, the standard retirement-planning approach was: pay into your pension first, draw from it last. The reasoning was straightforward:
- Pension contributions get income tax relief at your marginal rate
- Pension growth is tax-free
- Pensions could be passed to beneficiaries free of IHT (pre-75) or with only income tax (post-75)
This made the pension one of the most tax-efficient vehicles in the UK system, for retirement, for tax-efficient growth, and for inheritance.
The April 2027 change reverses the inheritance side of that logic. Pensions remain efficient for retirement income and for tax-relieved saving, but they are no longer a preferred vehicle for passing wealth to the next generation. Couples and individuals who have built up substantial pension pots specifically to leave to children or grandchildren need to rethink the strategy.
A worked example: post-75 effective tax rate
Take someone aged 80 with a £500,000 unused pension pot, dying after April 2027, with their nil-rate bands already used by the rest of their estate. Their beneficiary is a higher-rate (40%) taxpayer.
Step 1, IHT applied to the pension:
- £500,000 × 40% = £200,000 IHT
- Pension after IHT: £300,000
Step 2, Beneficiary draws the £300,000 and pays income tax (post-75 rule):
- £300,000 × 40% income tax = £120,000
- Beneficiary keeps: £180,000
Effective tax rate on the original £500,000: 64%.
If the beneficiary is an additional-rate (45%) taxpayer, or if drawdowns push them into a higher band, the effective rate rises further. The drawdown can be spread over years to manage the income tax, but the IHT 40% applies immediately.
Who is most affected by the change?
The change affects most pension holders to some degree, but the financial impact is biggest for:
- People with large defined contribution pensions intended to be passed on rather than fully drawn down
- Higher and additional-rate taxpayers' families (where beneficiary income tax is highest)
- Estates already above the nil-rate band thresholds before the pension is added
- Married couples planning to use one partner's pension as a legacy vehicle while drawing from other sources first
People with modest pension pots, or whose total estate (including the pension) stays below the available nil-rate bands, may see little or no direct IHT impact, but the principle of pensions as legacy vehicles still changes.
What planning options are there?
The fine print on how the new rules will operate is still being finalised at the time of writing. Several broad strategies are emerging as options to consider with a financial planner. None should be applied without specific advice for your circumstances.
1. Draw down pension earlier and use other vehicles for legacy
If pensions are no longer the best legacy vehicle, drawing from them more in your own lifetime, and shifting legacy intent to other assets (ISAs, life insurance in trust, lifetime gifts using the seven-year rule), may be more efficient.
2. Use lifetime gifts to reduce the estate
Lifetime gifts made more than seven years before death (Potentially Exempt Transfers) fall outside the estate. The £3,000 annual gift exemption, gifts out of normal income, and gifts on marriage are all unaffected by the seven-year rule.
3. Whole-of-life insurance written in trust
A whole-of-life policy in trust pays out a defined sum outside the estate, providing liquidity for beneficiaries to pay the IHT bill without selling other assets. Well-suited to predictable, large IHT exposures.
4. Charitable legacy planning
Leaving 10% or more of your net estate to charity reduces the IHT rate on the rest from 40% to 36%. See our tax-efficient giving guide.
5. Spouse-first drawdown strategies
Married couples can pass pensions to a surviving spouse IHT-free under the spouse exemption. Strategies that delay the IHT event to the second death, while making use of both spouses' nil-rate bands, remain relevant.
6. Reviewing pension death benefit nominations
With the new IHT charge, who you nominate (and how, discretionary vs binding nomination) affects the outcome. This is one of the simplest items to review, and is often out of date.
What is the timeline for action?
- Now (2025–early 2026): Quantify the current IHT exposure on your pension and total estate. Get clarity on the size of the issue first.
- 2026: Government implementation details and consultation outcomes expected. Review options as the rules firm up.
- 2026–April 2027: Window for restructuring, but bear in mind that lifetime gifts need seven years to fully escape IHT, and some strategies (switching investments, setting up trusts) take time to put in place properly.
- April 2027 onwards: New rules apply. Continued review at least annually.
Frequently asked questions
Does this apply to all pensions?
The change targets unused defined contribution pension pots and most pension death benefits. Some specific arrangements, such as dependant's scheme pensions in defined benefit schemes, have different treatment. Check your specific scheme; defined benefit rules are not yet fully clarified.
Does the change apply if I die before April 2027?
No. The current rules apply to deaths before that date. The new rules apply to deaths from April 2027 onwards.
Can I just give my pension away now?
You cannot gift pension funds directly during your lifetime in the way you can gift cash or property. You can draw from the pension (paying income tax on the withdrawal) and then gift the post-tax proceeds, which becomes a Potentially Exempt Transfer for IHT purposes.
What about the spouse exemption?
Pensions passed to a surviving spouse will continue to qualify for the unlimited spouse exemption from IHT, but the change at the second death is unaffected by this. Planning across the couple as a unit matters more under the new rules.
Should I stop contributing to my pension?
For most people, no. The income tax relief on contributions and tax-free growth inside the pension remain valuable. The change affects the inheritance side of the equation, not the retirement side. The right contribution level depends on your full financial picture.