From 6 April 2027, unused pension funds and most death benefits will be brought into the value of your estate for Inheritance Tax purposes. This is a legislated change, not a proposal, and it is still some way off — which is exactly why now is the right time to look at it calmly, rather than in a rush the week before it takes effect. Eighteen months is a sensible planning window. It is enough time to have a proper conversation with your financial adviser, check your paperwork, and make sure your Will and your pension arrangements are working together rather than sitting in separate boxes.
What actually changes
For many years, pensions have sat outside the estate for Inheritance Tax purposes. That is why they have often been used as a later-life planning tool — draw down other assets first, leave the pension until last, and pass on what is left largely free of Inheritance Tax. From 6 April 2027, that changes. Unused pension funds and most lump sum death benefits will be included in the value of the estate when Inheritance Tax is calculated.
There is also a practical, administrative change that is easy to miss. Pension scheme administrators will become responsible for reporting and, in many cases, paying the Inheritance Tax due on pension funds, working alongside the personal representatives who deal with the rest of the estate. That means your executors — the people named in your Will — will need to coordinate with the pension scheme as part of settling the estate, rather than treating the pension as something that simply pays out separately to a nominated beneficiary with no further involvement from the estate administration.
What does not change
It is worth being precise here, because this reform is often described in ways that make it sound bigger than it is. The income tax treatment of pension benefits on death remains a separate question and is not affected by this change. Whether a beneficiary pays income tax on money drawn from an inherited pension still depends on the well-established rule of whether you died before or after age 75. That distinction has not moved.
Spousal exemption also continues to apply in full. Pension funds left to a spouse or civil partner remain exempt from Inheritance Tax, in the same way as other assets passed between spouses. For most married couples, the immediate impact on the first death will often be limited for that reason. The change matters more on second death, and for anyone leaving pension benefits to children, other family members, or beyond a spouse.
The practical checks worth making now
None of this requires action today, but it is worth using the next eighteen months to get four things in order.
- Expression of wish and nomination forms. Most pension death benefits are still paid at the discretion of the scheme trustees, guided by the expression of wish form you have on file. These forms are easy to forget about for years at a time. If yours predates a divorce, a remarriage, a new grandchild, or simply reflects who mattered to you a decade ago, it is worth reviewing and updating it.
- Who the beneficiaries actually are. With pensions moving into the estate calculation, it is worth thinking through, alongside your adviser, whether your current nominated beneficiaries still make sense given the wider picture of your estate — not the pension in isolation.
- Whether the estate will have the liquidity to pay the tax. This is the point most easily overlooked. If a pension is now part of the taxable estate, the Inheritance Tax bill on death could be larger, and it needs to be paid before assets can always be distributed or, in some cases, before probate can be finalised. If a significant part of the estate’s value sits in a property and a pension, with limited cash alongside, personal representatives can find themselves needing to sell a property under time pressure simply to settle the tax bill. Thinking now about where the liquidity to pay Inheritance Tax will come from avoids that position later.
- Order of drawdown. The traditional approach of running down other savings first and leaving pension funds untouched for as long as possible was built for a world where pensions sat outside the estate. With that changing, the right order in which to draw on pensions versus other assets in later life is a conversation worth having with a financial adviser, in the context of your own circumstances. This is a financial planning question, not something to work out from a general article.
Why the pension is now part of the estate plan
The practical effect of this change is that a pension can no longer sensibly be planned in isolation from the Will and the rest of the estate. Historically, it has been common to treat the pension as a separate pot, governed by its own nomination form, sitting alongside the estate rather than within it. From April 2027, that separation stops making sense. Personal representatives dealing with the estate will need visibility of the pension, its likely value, and its intended beneficiaries, because it will feed directly into the Inheritance Tax position they are responsible for settling.
For business owners and property investors, this is particularly relevant. If your estate already carries value in a company, business assets, or investment property, adding pension funds into the taxable estate can shift the overall picture more than it might for someone with a simpler estate. It is one more reason to look at the estate as a whole — Will, pension, property, and business interests together — rather than reviewing each in turn as if they do not interact.
Why business owners and property investors should look now, not later
If you run a business or hold property alongside personal assets, your estate is already more complex than most, and it is usually less liquid. A trading company, commercial premises, or a portfolio of rental properties can represent significant value on paper while producing relatively little spare cash at any one time. Add a substantial pension fund into the taxable estate, and the gap between what the estate is worth and what cash is actually available to pay the Inheritance Tax bill can widen considerably.
This matters because Inheritance Tax generally has to be paid, or at least a substantial part of it, before probate is granted and assets can be distributed. Personal representatives who find themselves short of ready cash have historically had a limited number of options: borrow against the estate, use whatever cash reserves exist, or sell an asset quickly, often a property, sometimes at a price that reflects the urgency rather than the market. None of those are good outcomes for a family already dealing with a bereavement. Thinking through the liquidity position now, while there is no pressure and no deadline looming, is simply better planning.
It is also worth remembering that property held jointly with a spouse or business partner should be held as Tenants in Common rather than as joint tenants, so that each share can pass under the terms of a Will rather than automatically to the survivor. That structure matters more, not less, once pensions are part of the wider estate calculation, because it keeps control over how each person’s share of the estate — property, business interests, and now pension — is directed.
A conversation, not a rewrite
None of this means your existing Will, letter of wishes, or trust arrangements are wrong, or that you are missing something you should already have in place. It means that a genuine change in the tax rules is coming, and the sensible response is to revisit the plan you already have with this new information in mind, rather than to leave it until the rules are in force and options are narrower. For most people, that will mean a short conversation with a financial adviser about pension nominations and drawdown strategy, and a corresponding conversation with us about whether the Will and the estate plan still reflect the full picture.
What we would suggest
We are not financial advisers, and nothing here is investment or pension advice — the right order of drawdown, the right pension structure, and the right retirement income strategy are conversations for you and your financial adviser, who understands your full financial picture. What we can help with is making sure your Will and your estate plan reflect the fact that pensions are moving into scope for Inheritance Tax, and that your personal representatives will have the information and the liquidity they need to deal with it without a forced property sale.
With eighteen months before the rules take effect, there is time to do this properly. A short conversation with your financial adviser about your pension nominations and drawdown strategy, alongside a review of your Will, is the sensible next step — not because anything is wrong today, but because a change of this size is worth planning for early rather than scrambling to address in March 2027.