For years, pensions have sat in a favourable position in estate planning. Money left in a pension when you died was generally outside your estate for inheritance tax purposes, which is why many people were advised to draw on other savings first and leave the pension untouched for as long as possible. That approach is about to change, and anyone with a meaningful pension pot should understand why.
From 6 April 2027, for deaths on or after that date, most unused pension funds and pension death benefits will be included in the estate for inheritance tax purposes. The change was legislated in the Finance Act 2026, which received Royal Assent on 18 March 2026, so this is settled law rather than a proposal. HMRC has published a technical note on inheritance tax and pensions setting out how it will work.
What Is Actually Changing on 6 April 2027
The core change is straightforward to state, even though the consequences are wide. Where someone dies on or after 6 April 2027, the value of most unused pension funds and pension death benefits will form part of the estate when inheritance tax is calculated. Pensions will no longer sit neatly outside the inheritance tax net simply because they are pensions.
The other significant change is administrative. Personal representatives, meaning the executors named in a Will or the administrators of an estate where there is no Will, will report the pension property and be liable for the inheritance tax attributable to it. Once a pension benefit has vested, the beneficiary can also be jointly and severally liable for the tax attributable to that benefit. This expands the executor's job: the people you appoint will need to identify every pension you held, obtain values from each provider and account for them alongside your other assets.
What Stays Outside the New Rules
Not everything is caught. Death in service benefits paid from registered pension schemes remain out of scope, so a lump sum paid by an employer's registered scheme because you died while employed is not brought into the estate by this change. Dependants' scheme pensions, some continuing annuities, certain trivial commutation lump sums and other exempt benefits are also excluded under detailed conditions. If any of these are significant for your family, confirm the position with the scheme administrator.
The normal inheritance tax exemption for assets passing to a spouse or civil partner also continues to apply. In many couples, therefore, no tax arises on the first death and the question is really about what happens on the second. That makes joint planning as a couple far more useful than each person looking at their own position in isolation.
The Allowances That Still Apply
A few rules are central to inheritance tax calculations, and they matter more than ever once pensions are added to the mix.
- The nil rate band is £325,000. This is the amount of an estate that can pass free of inheritance tax before the standard rate applies.
- The residence nil rate band is £175,000. This additional allowance can apply where a home is passed to direct descendants, but it is reduced by £1 for every £2 by which the estate exceeds £2 million and can be lost entirely.
- Where at least 10 percent of the relevant part of an estate is left to charity, inheritance tax on that part can be charged at 36 percent instead of 40 percent. The calculation is more involved than a simple percentage of the whole estate.
- Allowances that are not used on a first death can often be transferred to a surviving spouse or civil partner, which is why couples should plan together.
The reason the 2027 change matters so much is arithmetic rather than anything exotic. Adding a pension pot to a house and some savings can push an estate from comfortably within the allowances to comfortably over them, and the amount above the threshold is where tax bites.
Who Should Pay the Most Attention
Anyone with a substantial defined contribution pot should review their position, but a few groups have particular reason to act.
- People who were deliberately leaving their pension untouched to pass it on tax efficiently, because the reasoning behind that strategy has changed.
- Homeowners in higher value areas, where the property alone may already use up much of the available allowances.
- Widows and widowers, who may hold inherited pension benefits as well as their own.
- People with several old workplace pensions they have lost track of, since executors cannot value what they cannot find.
- Anyone whose pension nomination form was completed years ago and has not been looked at since.
Sensible Preparation Before April 2027
Review Your Pension Nominations
Your expression of wish or nomination form tells the scheme who you would like to benefit. Many people completed one when they joined a job and have never revisited it, which means it may still name a former partner or omit children born since. Nominations are not part of your Will, so updating your Will does not update them. Both documents need attention.
Check the Executors Named in Your Will
Because personal representatives will have new reporting and tax responsibilities for pensions, the choice of executor carries more weight than it used to. Ask yourself honestly whether the people you have named would be comfortable tracing several pension providers, obtaining valuations and dealing with HMRC. If not, appointing a professional alongside a family member, or reviewing your Will to make a better appointment, may be worth considering.
Think About Estate Liquidity
Inheritance tax generally has to be dealt with before an estate can be distributed, which can create a problem if most of your value sits in a house and a pension. There is a mechanism allowing tax attributable to a pension to be paid directly to HMRC out of the pension funds, but other liabilities may still need cash from elsewhere. Understanding the likely position in advance, and making sure your family knows, can avoid a scramble at the worst time.
Consider Whether Trusts Have a Role
For some families, trusts form part of a sensible structure, for example where you want to control how and when a beneficiary receives money, or provide for a vulnerable relative. Trusts are not a shortcut around inheritance tax and they carry their own rules and reporting obligations, so they should only ever be set up on proper advice and as part of a plan that considers your whole position.
Take Advice, and Take It Early
Pension and inheritance tax planning interact with income tax, care fee planning, your family circumstances and your own need for retirement income. Decisions that look clever in isolation can be expensive overall, particularly if they involve giving money away that you later need yourself. Regulated financial advice on the pension itself, alongside estate planning advice on the Will and any trusts, is the combination that produces good outcomes.
Do Not Panic, But Do Not Wait Either
This change does not mean pensions are a bad way to save. They can remain a tax-efficient way to build retirement income, but whether contributions suit you depends on your circumstances and calls for regulated financial advice. What the change does mean is that a plan written on the old assumptions may no longer do what you intended, and there is a window before April 2027 to review it calmly rather than in a rush.
If you would like to understand how the April 2027 change affects your estate, and what to do about it, call AIB Estate Planning on 0800 048 7320. We will look at your Will, your executors, your beneficiaries and your overall structure, and tell you plainly whether anything needs to change.
This article is general information, not legal or financial advice. For guidance on your circumstances, call AIB Estate Planning on 0800 048 7320.
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