Pensions and Inheritance Tax: What the April 2027 Changes Mean for You
The Government has announced that, from 6 April 2027, most unused pension funds and pension death benefits are expected to be brought within the scope of Inheritance Tax, subject to the final legislation and any future changes.
Here is who the change affects and what to do about it.
This affects you if:
- You have a defined contribution pension pot you may not spend in your lifetime
- Your home already takes your estate close to the Inheritance Tax threshold
- You have been spending ISAs, savings or investments first and leaving your pension untouched, because that was the tax-efficient order
- You plan to leave pension money to your children or grandchildren
- You are choosing right now which assets to draw your retirement income from
If none of those describe you, the change may not need any action at all. Read on so you know why, then get on with your life.
What is actually changing
Today, most defined contribution pensions sit outside your estate when you die. That is why leaving the pension until last became standard planning: spend the taxable assets, preserve the pension, pass it on free of Inheritance Tax.
For deaths on or after 6 April 2027, under the expected changes that treatment changes. Unused pension funds and most death benefits would be added to the value of your estate, and anything above your available thresholds would be taxed at 40 percent. Deaths before 6 April 2027 would stay under the current rules, even if the money is paid out later.
Some benefits stay outside the new rules, including qualifying death in service payments, certain dependants’ scheme pensions and some joint life annuities. Two people with the same pension value can have very different outcomes depending on the scheme type, who the money goes to, and whether it is paid as a lump sum or income.
The trap to avoid: pulling money out in a panic
The most expensive mistake between now and 2027 will be withdrawing large pension sums just to beat the rule change.
A big withdrawal can push you into a higher Income Tax band in the year you take it. It moves money out of a tax-sheltered environment where it grows free of Capital Gains Tax. It weakens your own security if you later need care or simply live longer than you expected. You could easily pay 40 percent Income Tax today to avoid 40 percent Inheritance Tax that your estate might never have owed.
Leaving everything to a spouse or civil partner usually remains exempt. That helps, but for couples it often just moves the question to the second death, when the children inherit.
Income Tax still matters after you die
Inheritance Tax is only half the calculation. What your beneficiaries pay also depends on your age at death. Die before 75 and death benefits are often free of Income Tax for the recipient. Die after 75 and they usually pay Income Tax at their own rate on what they draw. From 2027, some families could face both taxes on the same money, which makes the order and timing of decisions matter more, not less.
What to do before April 2027
Start with your number: the total value of everything you own, including pensions. Until you know whether your estate actually crosses the Inheritance Tax threshold, you cannot know whether this change costs your family anything.
Finding that threshold is harder than it sounds. There is the 325,000 nil rate band, then a separate residence allowance that only applies if you leave a home to direct descendants, and tapers away above 2 million, adding your pension to that calculation changes the answer for a lot of families who currently assume they are fine.
Income Tax is the other half, and it is no simpler. The right amount to draw from a pension in any year depends on your tax band, what other income you have, and where the withdrawal lands against the higher rate threshold. Take too much in one year and you can hand HMRC 40 percent on money that careful timing would have kept at 20, or at nothing. Your age at death then changes what your beneficiaries pay all over again.
This is where advice can help. Not because the ideas are secret, gifting from surplus income, reordering which assets you spend first, updating nominations and your will are all sensible tools. But knowing which of them applies to you, in what order and in what amounts, means working through two overlapping tax systems with your actual numbers. That is a calculation, not a guess, and getting it wrong is expensive in a way that only shows up years later when your family inherits.
This is what PFM Associates does. PFM Associates is authorised and regulated by the Financial Conduct Authority. We are a Chartered financial planning firm, and we look at your pension, your estate and your retirement income as one picture, because from April 2027 that is how HMRC will look at them too. We will do the threshold calculation with your real figures, show you whether this change actually affects your family, and if it does, build a plan you understand. We will then use cashflow modelling to demonstrate the impact of different assumptions, markets and spending habits might have on your financial plan. Cashflow modelling uses assumptions and forecasts and is not a guarantee of future performance or outcomes.
If you have read this far and are still not sure where you stand, that is the signal to ask. Contact us for a no-obligation initial conversation.
*This article is for general information only and is not personal financial, tax or legal advice. Tax treatment depends on individual circumstances and may change. Tax treatment depends on individual circumstances and may change in the future. Estate planning and tax advice are not regulated by the Financial Conduct Authority
Author: Ian Long