Pension Inheritance Tax Changes 2027: What UK Savers Need to Do Now

A significant shift is coming to UK pension law that could affect how you manage your drawdown and plan your estate. From 6 April 2027, unspent pension pots will be drawn into the scope of inheritance tax (IHT) for the first time in decades – a change so significant it has already driven annuity sales to record levels.

If you're in drawdown, approaching retirement, or simply worried about what happens to your pension when you die, understanding these changes is essential. This guide explains what's changing, who is affected, and what options many people are considering in response.

What Is Changing?

Currently, defined contribution pension funds (including those held in drawdown) sit outside your estate for inheritance tax purposes. This means that if you die leaving an unspent pension pot, it generally passes to your nominated beneficiaries free of IHT – regardless of the size of your estate.

From 6 April 2027, this exemption is set to change. Under reforms announced in the Autumn Budget 2024, most unspent pension funds will be included in a person's estate when calculating inheritance tax liability. This applies to people who die on or after that date.

The key points to understand:

• Scope: The change applies to most defined contribution pensions, including those held in flexi-access drawdown
• Threshold: IHT is charged at 40% on estates above the nil-rate band (£325,000) and residence nil-rate band (£175,000 where applicable)
• Frozen thresholds: These IHT thresholds are frozen until April 2031, meaning more estates will be caught as pension pots and property values grow
• Administration: Pension scheme administrators will be responsible for reporting and paying the relevant IHT on pensions

Who Is Most Affected?

The impact varies considerably depending on individual circumstances, but those most likely to be affected include:

Wealthier Retirees With Large Pension Pots

If you have a substantial pension in drawdown and your overall estate (including property, savings and now the pension) exceeds £500,000 (or £1 million for a married couple using both nil-rate bands), the pension fund could now push you into IHT territory or significantly increase the tax bill.

Those Using Pensions as Inheritance Planning Vehicles

Many people chose flexi-access drawdown specifically because unspent funds could be passed on tax-efficiently. Some withdrew from ISAs or other savings first, leaving the pension pot to pass on outside of IHT. This strategy needs careful review in light of the 2027 changes.

Those With Defined Benefit Pensions

The position for defined benefit (final salary) pensions is less clear-cut. Death benefits and pension income rights work differently, so it's worth seeking guidance specific to your scheme.

Middle-Class Estates Caught by Frozen Thresholds

The combination of rising property values, growing pension pots, and frozen IHT thresholds until 2031 means many families who wouldn't have previously considered themselves wealthy enough to worry about IHT could now find themselves in scope.

How Pension Drawdown Fits In

Under flexi-access drawdown, your pension pot remains invested and you take withdrawals as needed. Anything unspent at death is currently passed to nominated beneficiaries, with the tax treatment depending on your age at death:

• Die before age 75: Beneficiaries typically receive the fund free of income tax (lump sum or drawdown)
• Die aged 75 or over: Beneficiaries pay income tax on withdrawals at their marginal rate

From April 2027, there will be an additional layer to consider: IHT may also be due on unspent drawdown funds if the overall estate exceeds the nil-rate bands. This means beneficiaries could potentially face both IHT on the pension and income tax on subsequent withdrawals – a "double taxation" concern that many advisers are flagging.

Why Annuity Sales Are Rising

Data from the Association of British Insurers shows pension annuity sales reached record levels in early 2026 – and the IHT changes are widely cited as a contributing factor. Average pension pots now exceed £80,000, and some savers are choosing to convert their pension to a guaranteed income (an annuity) rather than leave funds unspent in drawdown.

An annuity provides income for life but ends at death (unless you purchase a joint life or guaranteed period option). Once spent on income, there is nothing left to include in the estate for IHT. For some people, this shift in the estate planning equation is making annuities look more attractive than they did a few years ago.

It's worth noting that this is not a straightforward trade-off: annuities also have drawbacks including lack of flexibility, no residual value for beneficiaries, and exposure to inflation risk. The right choice depends heavily on individual circumstances.

Options Many People Are Considering

Financial planners are seeing increased interest in a range of strategies in response to the pension IHT changes. These include:

Drawing Down Faster

Rather than leaving the pension largely intact and drawing minimally, some people are considering taking larger withdrawals to reduce the size of the pension pot, making gifts to family during their lifetime (subject to the seven-year rule), or spending on lifestyle or property improvements.

Pension Income and Gifting

Regular gifts from pension income can potentially be exempt from IHT as "normal expenditure out of income", provided they meet HMRC conditions. This is a legitimate estate planning tool that many people overlook.

Reviewing Nomination of Beneficiaries

Who you nominate to receive your pension on death remains important. Your pension provider holds this on your nomination form – it's worth reviewing and updating it regularly to reflect your current wishes.

Blended Annuity/Drawdown Approaches

Some people are considering converting part of their pension pot to an annuity (guaranteeing core income) while keeping a portion in drawdown for flexibility. This "blended" approach aims to balance income security with estate planning flexibility.

Trusts and Other Estate Planning

The interaction between pension death benefits and trusts is complex. Some pension schemes allow benefits to be written into trust, though the rules vary and the IHT treatment under the new regime is still being clarified by HMRC.

What About the Nil-Rate Bands?

It's important to understand the thresholds involved:

• Nil-Rate Band (NRB): £325,000 per person – this has been frozen since 2009 and remains so until 2031
• Residence Nil-Rate Band (RNRB): An additional £175,000 is available where a main home passes to direct descendants. This is subject to taper for estates over £2 million
• Spousal exemption: Transfers between UK-domiciled spouses remain exempt from IHT. Unused nil-rate bands can also be transferred to a surviving spouse
• Combined allowance: A married couple can potentially shelter up to £1 million from IHT (two NRBs and two RNRBs) – but adding a large pension pot above that could still create a significant liability

Timeline: What's Already Changed, What's Coming

Date	Change
October 2024	Autumn Budget announcement: pensions to be included in IHT from April 2027
April 2026	IHT thresholds remain frozen; various agricultural/business relief changes take effect
April 2027	Pension pots included in estate for IHT purposes (for deaths on or after 6 April 2027)
April 2031	IHT thresholds currently scheduled to be reviewed

What This Means for Drawdown Planning

If you are currently in drawdown – or planning to enter drawdown – the 2027 pension IHT changes are a significant factor in your planning. The traditional approach of "spend other assets first, leave the pension to pass on" may no longer be the most tax-efficient strategy for many people.

Instead, it may make sense to consider:

• Sequencing: The order in which you draw on different assets (ISAs, savings, pension) and how that affects your estate
• Withdrawal rate: Whether drawing more from the pension now (within sensible tax bands) is more efficient than leaving it to accumulate and potentially be subject to IHT
• Nomination forms: Ensuring beneficiaries are correctly nominated and forms are up to date with your pension provider
• State pension interaction: How state pension income (rising 4.8% from April 2026) affects your overall retirement income picture

Important: The Rules Are Still Being Finalised

It is important to note that as of early 2026, the detailed implementation rules for the pension IHT changes are still being consulted on by HMRC. There are unresolved questions around:

• How the liability will be calculated and collected
• The interaction with existing death benefit nomination structures
• Treatment of certain types of pension and trust arrangements

This means the full picture will only become clear as legislation progresses through Parliament. Monitoring guidance from HMRC, the FCA, and professional bodies will be important in the run-up to April 2027.

Summary

The upcoming inclusion of pension pots in estate calculations for IHT purposes represents one of the most significant changes to pension planning in a generation. For those in drawdown, the implications are real and potentially substantial – particularly for larger estates already close to or above the nil-rate bands.

Many people with defined contribution pensions and meaningful estates are reviewing their drawdown strategies, withdrawal patterns, and estate planning arrangements in light of these changes. The key message is that the strategies that worked well for inheritance planning before 2027 may need adjustment.

Record annuity sales suggest many savers are already reconsidering their options. Whether drawdown, annuity, or a blended approach is right for any individual depends on a wide range of factors including health, income needs, estate size, family circumstances, and risk tolerance.

The information in this article is educational and does not constitute financial or tax advice. The pension inheritance tax changes described are based on current government announcements and are subject to final legislation. Speak to a qualified financial adviser and, where relevant, a tax specialist for guidance tailored to your personal circumstances.

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Further reading: Pension Inheritance Tax 2027: What's Changing and What You Need to Know

From April 2027, a significant change to UK pension rules will come into effect that could affect how your pension is treated when you die. Under the new rules, unused pension funds will be included in your estate for inheritance tax (IHT) purposes. This represents one of the most significant shifts in pension taxation in recent years.

What Are the Current Rules?

Under the current system, defined contribution (DC) pensions sit outside your estate for inheritance tax purposes. This means that when you die, any money remaining in your pension can be passed to your beneficiaries without being subject to IHT, regardless of how much is in the pot.

The income tax treatment depends on your age at death:

• Death before age 75: Beneficiaries can typically receive the pension fund tax-free, whether taken as a lump sum or as income through drawdown
• Death at age 75 or over: Beneficiaries pay income tax at their marginal rate on any withdrawals

This favourable treatment has made pensions an attractive vehicle for estate planning. Many people have chosen to leave their pension untouched for as long as possible, living off other assets and passing their pension to the next generation.

What's Changing from April 2027?

The key change is that unused pension funds will be brought into the scope of inheritance tax from 6 April 2027. This means:

• The value of your pension at death will be added to your estate when calculating IHT liability
• If your total estate (including the pension) exceeds the nil-rate band (currently £325,000), IHT at 40% may be payable on the excess
• The residence nil-rate band (currently £175,000) may also apply if you're leaving your home to direct descendants

It's important to note that the income tax rules on pension death benefits are expected to remain unchanged. Beneficiaries will still pay income tax on withdrawals if the pension holder dies at 75 or over.

Who Could Be Affected?

The people most likely to be affected by these changes include:

• Those with substantial pension pots: If you have significant pension savings that you were planning to pass on, the IHT treatment will be different from what you may have assumed
• Those using pensions for estate planning: If your strategy involved preserving pension assets to pass to the next generation tax-efficiently, this approach may need to be reconsidered
• Those with estates already near the IHT threshold: Adding pension assets to the calculation could push estates into IHT territory

However, many people with modest pension savings and overall estates below the IHT thresholds may find the changes have little practical impact on their situation.

Potential Implications for Retirement Planning

These changes may prompt some people to reconsider their approach to retirement income. Some points worth thinking about include:

Drawing Down Pension Income

Some people may consider whether to draw more income from their pension during their lifetime rather than leaving it untouched. By taking pension income and either spending it or gifting it (which may fall outside your estate after seven years), the overall IHT liability could potentially be reduced.

Spending Patterns in Retirement

The traditional advice to spend other assets first and preserve the pension may be worth revisiting. Some people may find it makes sense to take a more balanced approach, drawing from multiple sources rather than heavily prioritising the pension for inheritance. Understanding sustainable withdrawal rates can help with this planning.

Life Insurance and Estate Planning

Those concerned about potential IHT liabilities may wish to explore options such as life insurance policies written in trust, which could provide funds to help beneficiaries meet any tax bill without having to sell assets.

Gifting Strategies

Making gifts during your lifetime can be an effective way to reduce your estate for IHT purposes. Certain gifts are immediately exempt, while potentially exempt transfers (PETs) fall outside your estate if you survive seven years.

Important Considerations

Before making any changes to your retirement plans based on these rules, there are several important factors to consider:

• Your primary need is retirement income: The most important function of your pension is to provide for your own retirement. Any inheritance planning should be secondary to ensuring you have sufficient income throughout your life
• Rules may change: There is always the possibility that legislation could be amended before April 2027, or that future governments could make further changes
• Everyone's situation is different: What makes sense for one person may not be appropriate for another. Your health, family circumstances, other assets, and income needs all play a role
• Tax planning is complex: IHT planning involves many moving parts, and changes made to address one issue could have unintended consequences elsewhere

The Nil-Rate Bands Explained

Understanding the IHT thresholds is crucial when thinking about these changes:

• Standard nil-rate band: £325,000 – this has been frozen at this level since 2009 and is set to remain frozen until at least 2028
• Residence nil-rate band: £175,000 – available when leaving a home to direct descendants (children, grandchildren). This can be transferred between spouses
• Transferable allowances: Married couples and civil partners can transfer unused nil-rate bands to the surviving spouse, potentially allowing up to £1 million to pass tax-free when the second spouse dies

The residence nil-rate band tapers away for estates over £2 million, reducing by £1 for every £2 above this threshold.

Defined Benefit Pensions

The changes primarily affect defined contribution pensions, where you have a pot of money that can be passed on. Defined benefit (final salary) pensions work differently – they typically provide a spouse's pension after death but don't have a 'pot' that can be inherited in the same way.

Some defined benefit schemes do offer lump sum death benefits, and the treatment of these may be affected by the 2027 changes. Members of such schemes may wish to check with their scheme administrators for specific information.

What Should You Do Now?

Given that April 2027 is still some way off, there's no need to make hasty decisions. However, it may be worth:

• Reviewing your overall financial position: Understand the total value of your estate, including your pension, property, savings and investments
• Considering your retirement income needs: Make sure you have a clear picture of how much income you'll need throughout retirement
• Keeping beneficiary nominations up to date: Ensure your pension provider knows who you want to inherit your pension
• Speaking to a qualified adviser: Given the complexity of this area, professional advice can help you understand how the changes might affect your specific circumstances

Final Thoughts

The inclusion of pensions in estates for IHT purposes from 2027 represents a significant change to the tax landscape. While it may prompt some people to reconsider their retirement income strategies, it's important not to let tax considerations override your fundamental need for a secure retirement income.

The right approach will depend entirely on your individual circumstances, including your health, family situation, other assets, and income requirements. What works well for one person may not be suitable for another.

As with all aspects of retirement planning, staying informed and reviewing your plans regularly is sensible. The rules around pensions and taxation have changed many times over the years and will likely continue to evolve.

This article is for informational purposes only and does not constitute financial advice. Pension and tax rules are complex and subject to change. Please speak to a qualified financial adviser for guidance tailored to your personal circumstances.

Related Articles

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• Emergency Tax On Pensions
• Pension Consolidation Pros Cons

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Further reading: Pensions and Inheritance Tax: How the April 2027 Changes Will Affect Your Drawdown Plan

Until now, your pension pot has been one of the most tax-efficient assets you could pass on. Sitting outside the estate for inheritance tax (IHT), it could be paid to your beneficiaries either tax-free (if you died before 75) or taxed only at their marginal income tax rate (if you died after 75). For people with sizeable drawdown pots, this turned pensions into a powerful intergenerational wealth tool — sometimes spent last for exactly that reason.

That changes from 6 April 2027. The government has confirmed that most unused pension funds and death benefits will be brought within the scope of inheritance tax for the first time. If you are in drawdown, or planning to enter it, this single change could materially alter how much of your retirement savings reaches your family — and how you should think about spending order, gifting, and legacy planning over the next few years.

Here is what is actually changing, who is affected, and the practical steps worth considering before April 2027 arrives.

What is changing on 6 April 2027

From this date, the value of most unused pension funds — including defined contribution pensions in drawdown, uncrystallised funds, and certain death-in-service lump sums — will be added to the deceased's estate for IHT purposes. The standard 40% IHT rate will then apply to the slice of the combined estate above the available nil-rate bands.

The key points to bear in mind:

• The nil-rate band remains £325,000 (frozen until at least April 2030)
• The residence nil-rate band remains £175,000, subject to the £2 million taper threshold
• The spouse exemption still applies — pensions left to a spouse or civil partner pass IHT-free
• The existing income tax treatment on inherited drawdown pots (tax-free pre-75, marginal rate post-75) remains, so beneficiaries could face both IHT and income tax on the same money

The combined effect is significant. A single retiree with a £500,000 pension and a £450,000 home could see well over £100,000 of additional IHT under the new rules, where previously the pension would have been entirely outside the estate.

Why pensions were historically IHT-efficient

A quick bit of context: under current rules, unused pension funds sit outside the estate for IHT. The original logic was that pensions are for retirement income, not wealth transfer. But over the last decade, that argument became increasingly difficult to defend. With pension freedoms making drawdown the norm, and inherited pension pots passing down free of IHT, many higher-net-worth households learned to spend ISAs and other taxable wealth first — and leave the pension for the next generation.

HMRC estimates around 8% of estates will pay additional IHT once the change comes in. The numbers will skew towards households with pension pots of £200,000 or more combined with property in the South East or other higher-value regions.

Who is most affected

Three groups should pay particular attention:

1. Single retirees, widows and widowers with substantial pension pots. The spouse exemption is not available, so the entire combined estate is in scope at first death.
2. Higher-rate taxpaying retirees who were planning to leave pensions untouched. The strategy of "spend taxable money first, pensions last" needs revisiting.
3. Those with estates between £500,000 and £2 million. Below £500,000 the nil-rate bands often cover everything anyway. Above £2 million the residence nil-rate band tapers away. The middle band is where most behaviour change is likely to make sense.

What this means for your drawdown strategy

The fundamental question shifts from "how do I make this money last?" to "how do I make this money last while minimising the combined tax bill on me and my beneficiaries?". A few practical implications follow.

Spending order may flip

It may now make sense to draw from pensions earlier and more aggressively, while leaving ISAs (which sit inside the estate anyway, and pass to beneficiaries free of further income tax in their hands) until later. A surviving spouse can also inherit the ISA allowance via the Additional Permitted Subscription, which preserves the tax wrapper.

Annuities become relatively more attractive

Lifetime annuities do not leave a residual pot, so they do not add to your estate. For people who would otherwise leave a large drawdown balance, this rebalances the calculation. Joint-life or value-protected annuities can give some flexibility while removing IHT exposure on the bulk of the pension.

Gifting strategies need revisiting

The seven-year gift rule still works. Pension income that you do not need can be drawn, taxed, and gifted — moving it out of the estate over time. The normal expenditure out of income exemption is particularly powerful here: regular gifts made from surplus income that do not affect your standard of living are immediately outside the estate, with no seven-year wait.

Pension contributions may need a second look

For someone in their 50s with a large pot, adding more in could now create future IHT liability rather than purely deferring income tax. The maths still favours contributions in most cases due to the tax relief, but the calculation is closer than it used to be — particularly for non-earners using the £3,600 gross limit purely as an inheritance shelter.

A worked example

Consider Margaret, age 68, widowed, living in Surrey:

• Home worth £600,000
• ISA holdings of £180,000
• Pension drawdown pot of £420,000
• Total estate: £1,200,000

Under current rules: the pension is excluded. Her estate for IHT is £780,000. Subtract £500,000 in nil-rate bands (NRB plus RNRB) and £280,000 is taxable at 40%, producing an IHT bill of £112,000.

From 6 April 2027: the pension is included. Her estate for IHT becomes £1,200,000. Subtract £500,000 in nil-rate bands and £700,000 is taxable at 40%, producing an IHT bill of £280,000 — an extra £168,000 going to HMRC rather than her children.

If Margaret, between now and 2027, draws an extra £40,000 per year from her pension above what she needs for living costs, pays the income tax, and gifts the net amount to her adult children — and then survives the seven-year period — she could potentially reduce the additional IHT exposure by a meaningful margin. The arithmetic needs to be done carefully, taking life expectancy and investment returns into account. But doing nothing is no longer a neutral choice.

What to think about before April 2027

You do not need to panic, but you do need to plan. Some questions worth working through:

• What does your estate look like today, including pensions? Get a clear total.
• Who are your nominated beneficiaries on each pension? Is the expression of wish form current?
• Have you reviewed your nominee and successor drawdown options? These still have value for the post-75 income tax treatment, even after the IHT change.
• Could increasing your withdrawal rate now, and gifting from net income, reduce future IHT?
• Is a joint-life annuity, fixed-term annuity, or partial annuitisation worth modelling?
• Have you used your £3,000 annual gift allowance and the normal expenditure out of income exemption?

These are the kinds of decisions where the maths is sensitive to assumptions about life expectancy, investment returns, and your spouse's circumstances. Stress-testing different scenarios is worthwhile — our pension drawdown calculator and retirement planner can help you visualise the effect of different withdrawal rates.

Key takeaways

• From 6 April 2027, most unused pensions will count towards your estate for inheritance tax.
• The nil-rate band (£325,000) and residence nil-rate band (£175,000) are unchanged, and the spouse exemption still applies.
• Beneficiaries may face both IHT and income tax on the same inherited pension money, particularly for deaths after age 75.
• The "spend ISAs first, pensions last" strategy needs serious revisiting for many households.
• Earlier drawdown combined with lifetime gifting from income is one of the most powerful planning levers available.
• Annuities — particularly joint-life and fixed-term — become relatively more attractive for people prioritising legacy outcomes.

A note on professional advice

The interaction between income tax, inheritance tax, and pension rules is genuinely complex, and the right answer is highly personal. The figures and strategies described here are general information, not financial advice. If you have a pension pot of any meaningful size and want to model the impact of the April 2027 changes on your own situation, you may want to speak to a regulated financial planner.

In the meantime, you can use our retirement planner to map out different withdrawal scenarios, or compare drawdown providers side-by-side to make sure the platform you are using supports the flexibility your revised plan may need. For more on the wider drawdown landscape, our blog covers the topics retirees and pre-retirees are asking about most.