What Is Changing in April 2027?
In the Autumn Budget of October 2024, the Chancellor announced that from 6 April 2027, unused pension funds and death benefits will be brought within the scope of inheritance tax (IHT). This is the most significant change to how pensions interact with IHT since the pension freedoms of April 2015, and it will affect millions of UK pension holders.
Under the current rules, pension funds sit entirely outside your estate for IHT purposes. This means that regardless of how large your pension pot is, it is not counted when calculating whether your estate exceeds the nil-rate band. This has made pensions one of the most powerful IHT planning tools available, with many people deliberately preserving their pension and spending other assets first.
From April 2027, that advantage will be removed. Your pension fund at death will be added to the value of your estate, and if the total exceeds the available nil-rate bands, IHT at 40% could apply to the excess.
Who Is Affected?
The change will affect anyone whose total estate — including their pension — exceeds the IHT nil-rate band. The current thresholds are:
| Allowance | Amount | Notes |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | Available to everyone; frozen until at least 2030 |
| Residence nil-rate band (RNRB) | £175,000 | Available when passing your main home to direct descendants |
| Combined individual threshold | £500,000 | NRB + RNRB (if RNRB conditions are met) |
| Combined couple threshold | £1,000,000 | Transferable unused allowances between spouses |
If your total estate including your pension is below these thresholds, you will not be affected. However, many people who thought they were below the IHT threshold may find themselves above it once their pension is included. For example, someone with a £300,000 home, £100,000 in savings, and a £200,000 pension would have a total estate of £600,000 — above the individual £500,000 threshold.
How Will Pensions Be Valued for IHT?
The valuation methodology depends on the type of pension:
DC Pensions
For defined contribution pensions (including SIPPs, workplace DC pensions, and personal pensions), the IHT value will be the total fund value at the date of death. This is relatively straightforward as DC pensions have a clear monetary value.
DB Pensions
Valuing defined benefit pensions for IHT is more complex because DB pensions provide an income rather than a lump sum. The government has indicated it will use a multiplier approach, where the annual pension is multiplied by a factor to produce a capital value. The exact multiplier has not yet been finalised, but consultation documents suggest it could be based on actuarial tables reflecting life expectancy and pension characteristics.
This is significant because many people with DB pensions have not previously considered them as part of their estate. A DB pension paying £20,000 per year could be valued at several hundred thousand pounds for IHT purposes, depending on the multiplier used.
The Double Taxation Problem
One of the most concerning aspects of the 2027 changes is the potential for double taxation. If you die at 75 or over with a DC pension, your beneficiaries currently pay income tax on withdrawals at their marginal rate. Under the new rules, the pension will also be subject to IHT at 40% (if above the threshold). This means the same pension fund could face both taxes.
| Tax Layer | Rate | Example: £200,000 Pension (Death at 75+, Estate Over NRB) |
|---|---|---|
| IHT at 40% | 40% | £80,000 |
| Income tax on remaining £120,000 (at 40% higher rate) | 40% | £48,000 |
| Total tax (without relief) | 64% effective | £128,000 |
| Net amount to beneficiary | 36% | £72,000 |
The government has acknowledged this problem and indicated that some form of double taxation relief will be provided. However, the exact mechanism is not yet confirmed. Possible approaches include:
- An income tax credit for IHT already paid on the pension
- Allowing the IHT to be deducted from the pension before income tax is calculated
- A reduced IHT rate on pension funds
The Spousal Exemption
One critical protection remains: the spousal exemption. Pensions left to a surviving spouse or civil partner will continue to be exempt from IHT. This means no IHT is due on pension death benefits passing between spouses, regardless of the amount.
This makes the decision about who to nominate as your pension beneficiary even more important. Leaving your pension to your spouse avoids IHT on the first death, but it concentrates the pension in the surviving spouse's estate, where it could face IHT when they die.
Preparing for April 2027: Steps to Take Now
While the final rules have not been confirmed, there are practical steps you can take now to prepare:
- Calculate your total estate including pension — add up your property, savings, investments, and pension pots to understand whether you are likely to be above the IHT threshold
- Review your pension nominations — ensure your expression of wish forms are current and reflect your intentions in light of the new rules
- Reconsider your spending order — the strategy of preserving your pension for inheritance may no longer be optimal if the pension will be subject to IHT
- Explore lifetime gifting — using your annual IHT exemptions and potentially exempt transfers to reduce your estate below the threshold
- Consider life insurance in trust — a whole-of-life policy written in trust can provide a tax-free lump sum to cover any IHT liability
- Review your will — ensure your will and pension nominations work together as a coherent estate plan
- Seek professional advice — the interaction between pensions, IHT, and income tax is complex, and the rules are still evolving
What Should You Not Do?
It is equally important to avoid knee-jerk reactions before the final rules are confirmed:
- Do not rush to withdraw your pension — taking large withdrawals purely to avoid IHT could trigger significant income tax and may leave you worse off overall
- Do not transfer DB to DC purely for IHT reasons — the 2027 changes affect both DC and DB pensions, so a transfer may not help and could mean losing valuable guaranteed income
- Do not set up complex trust structures — until the final rules (including any anti-avoidance provisions) are known, it is premature to incur the cost of setting up bypass trusts or similar arrangements
- Do not panic — pensions remain one of the most tax-efficient savings vehicles in the UK, even with the IHT change. Tax relief on contributions, tax-free growth, and the 25% tax-free lump sum all still apply
Timeline and What to Watch For
The government published a consultation on the pension IHT changes following the Autumn Budget 2024. Key dates and milestones to watch for include:
- Consultation response — expected to confirm the detailed rules, including valuation methodology for DB pensions and the double taxation relief mechanism
- Draft legislation — expected in a Finance Bill before April 2027
- 6 April 2027 — the new rules are scheduled to take effect
We will update this guide as new information becomes available. For the latest developments, check our guide on pension inheritance tax changes 2027.
Next Steps
If you have significant pension savings, now is the time to review your estate plan. Do not wait until April 2027. The earlier you plan, the more options you have. Get matched with an FCA-regulated adviser who can help you model the impact of the changes on your specific situation.