The Single Biggest Change to Estate Planning in a Generation
For the last decade, pensions have been the most inheritance-tax-efficient asset most families own. Advice was straightforward: spend other savings, leave the pension untouched, pass it on outside the estate. That logic ends on 6 April 2027.
From that date, most unused pension funds and pension death benefits will be included in the value of a deceased person’s estate for inheritance tax purposes. The reform was legislated for in Finance Act 2026, and HMRC’s technical note — most recently updated on 29 May 2026 — sets out how the mechanics will work in practice.
This matters far beyond the wealthy. A couple with a £700,000 house and £500,000 of pensions between them previously had an estate of £700,000 for inheritance tax. From April 2027 that becomes £1.2 million, and the residence nil-rate band taper starts to bite above £2 million. Families who have always assumed they were “under the threshold” are the ones most likely to be caught.
What Actually Changes
Three practical consequences matter most.
Pensions count towards the estate
Unused defined contribution funds, and most lump sum death benefits, are brought into the estate value. The £325,000 nil-rate band and transferable spousal allowances still apply, but the pension now uses them up alongside the house.
The spouse exemption still works
Leaving a pension to a spouse or civil partner remains exempt from inheritance tax, as with any other asset. The charge arises when the money passes to children or other beneficiaries — either on the second death, or on the first if the pension is left directly to children.
Income tax can apply on top
Where the member dies at or after 75, beneficiaries already pay income tax at their marginal rate on pension withdrawals. From April 2027, inheritance tax may apply to the same fund first. The combined effect on a higher-rate beneficiary can be severe, and it is the main reason to model outcomes now rather than in 2027.
The administration falls on personal representatives
HMRC’s technical note confirms that personal representatives will be responsible for reporting pension values and settling the inheritance tax due, working with scheme administrators. Further guidance, evidence requirements and templates are due to be published for April 2027. In practice this means executors will need pension information quickly — another reason to leave a clear record of every scheme you hold.
The Twenty-Month Planning Window
Nothing here requires panic, and nothing here justifies emptying a pension in a hurry — a badly timed withdrawal can cost more in income tax than it saves in inheritance tax. But the sequence of sensible steps is now reasonably clear.
1. Find out what you actually have
Most people over 55 have three to six pension pots and a vague idea of the total. Get a current value for each, note whether it is defined contribution or defined benefit, and check who is named on the expression of wish form. That last point is routinely years out of date.
2. Rethink the spending order in retirement
The old rule — spend savings, preserve the pension — often reverses after April 2027. Drawing pension income within your basic or lower rate bands, and using the money to fund gifts or to live on while other assets grow outside the estate, may produce a materially better family outcome. This is arithmetic, and it should be done with real numbers.
3. Use the gifting exemptions properly
Regular pension income creates the ideal conditions for gifts out of surplus income, which are immediately exempt from inheritance tax if properly documented. Add the £3,000 annual exemption, small gifts of £250, and wedding gifts. Documentation is what makes these stand up — keep a record of income, expenditure and the pattern of gifts.
4. Consider life cover to meet the bill
A whole-of-life policy written in trust pays out outside the estate and gives the family liquidity to pay inheritance tax without selling the house or crystallising a pension at a bad time. For couples, a joint-life second-death policy is usually the efficient structure.
5. Review your Will and any trusts alongside the pension
The pension no longer sits neatly outside the estate plan, so it should be looked at as part of it. Nil-rate band planning, life interest trusts protecting a surviving spouse, and trusts for vulnerable or divorcing beneficiaries all interact with a suddenly larger taxable estate.
6. Update expression of wish forms — and keep them current
Scheme administrators still exercise discretion over death benefits. A form naming an ex-spouse, or a deceased relative, causes delay and sometimes the wrong outcome. It takes ten minutes to fix.
What Not to Do
- Do not strip your pension in a rush. Large withdrawals can push you into the 40% or 45% income tax bands, and above £100,000 into the 60% effective trap between £100,000 and £125,140.
- Do not gift money you may need. Care costs, longevity and inflation are real risks. Inheritance tax planning that leaves you dependent on your children has failed.
- Do not rely on 2026 assumptions. HMRC guidance is still being finalised for April 2027. Build flexibility into the plan and review it after the detail is published.
The Point
April 2027 does not make pensions a bad thing to own. It ends the era of treating them as an inheritance tax shelter that sits outside the plan. Families who model the numbers, adjust the order in which they spend and give, and review their Wills in the same exercise will keep most of the advantage. Families who wait until 2027 will be reacting to a bill.
If you would like your pensions, property and Will looked at as one picture — with the April 2027 rules applied — that is exactly the review to have this year.