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

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.