Before April 2027, unspent defined contribution pension funds fell outside the estate for inheritance tax entirely. A pension of any size could pass to family members without triggering an IHT charge — a significant advantage that made pensions one of the most tax-efficient vehicles for passing wealth between generations.
From 6 April 2027, that changes. Under the Finance Act 2026, most unspent pension funds and pension death benefits will be brought within the estate and taxed at the standard 40% IHT rate on the portion above the available nil-rate band and residence nil-rate band thresholds.
For families with substantial pension wealth, this is a material change to their estate plan. The planning that was appropriate two years ago may now produce a significantly worse outcome.
Death benefit nominations tell pension trustees who should receive your pension funds on death. Under the new rules, the choice of beneficiary affects the IHT treatment. Nominations made before the April 2027 changes may no longer reflect the best outcome.
Before April 2027, many clients preserved their pension and spent other assets first. For some, the logic now reverses: drawing the pension first and preserving ISA or other assets may produce a better overall outcome for the estate. The right answer depends on your tax position and estate size.
Adding the pension to the estate for IHT purposes pushes many people above the £325,000 nil-rate band (£650,000 for couples) for the first time. Once above this threshold, the pension is taxed at 40%. If you have not modelled your revised estate position, you may not know how much is at stake.
The pension commencement lump sum (25%, capped at £268,275) is taken free of income tax and moves funds out of the pension and into other assets that may be treated differently for IHT. Whether taking it sooner makes sense depends on the broader estate and income tax position.
Pension funds can still pass to a surviving spouse free of IHT on the first death. But this is a deferral, not a permanent exemption. The pension then sits in the surviving spouse's estate and faces IHT on the second death. Planning for the second death now matters more.
Some clients have used trust structures alongside pension planning. The Finance Act 2026 changes affect how pension death benefits interact with certain trust arrangements. Existing structures should be reviewed to confirm they still achieve their intended purpose.
Pension inheritance tax planning at Aetas Wealth is led by Peter Rose, a Chartered Financial Planner and Pensions Specialist with over 50 years of experience advising private clients, families and business owners.
Peter holds the Advanced Diploma in Financial Planning (APFS) from the Chartered Insurance Institute and leads Aetas Wealth's work on the Finance Act 2026 pension changes. He advises clients on pension drawdown strategy, death benefit nominations, and coordinated estate planning across pensions, property and investments.
The Financial Conduct Authority does not regulate Wills, Trusts or Tax advice. Tax treatment depends on individual circumstances and may be subject to change in the future. The value of your investments can go down as well as up, so you could get back less than you invested. The information on this page is educational and does not constitute regulated financial advice. If you are considering making changes to your pension or estate plan in light of the Finance Act 2026 changes, we recommend speaking with a regulated financial adviser.
The first conversation is free and carries no obligation. We will talk through your pension position and what the April 2027 changes mean for your estate.
Book a conversation with Peter