How the 2027 pension tax change could redefine wealth transfer
Pensions have long been seen as a tax-efficient way to pass on wealth but that could soon change. With new rules expected from April 2027, understanding how your pension may be taxed is becoming increasingly important.
Pensions have traditionally been regarded as a tax-efficient way to pass on your wealth to the next generation. However, upcoming changes could affect how they are treated and how much tax may need to be paid during the wealth transfer process. This makes proactive planning more important than ever.
Please note that tax rules can change in the future and the impact on your own situation will depend on your individual circumstances.
Why pensions play such an important role in wealth transfer
Pensions have long been viewed as a powerful tool for passing on wealth to family members and future generations. This is because these assets have generally been exempt from inheritance tax (IHT) due to their exclusion from an individual's estate. This is one of the reasons why many retired people have chosen to draw income from other assets first - such as ISAs (Individual Savings Accounts) or other savings accounts - to preserve their pension savings for their beneficiaries.
However, in 2027, new policy changes mean many people may have to reconsider their inheritance planning and determine whether their current approach is still appropriate. The extent to which these changes affect you will depend on the value of your assets, how they are structured and your personal tax position.
What’s changing?
From 6 April 2027, most unused pension funds and pension death benefits will be included in the valuation of a person's estate after they die, which means they may be subject to inheritance tax. This reflects current proposals and legislation may be subject to change before implementation.
Why this matters
This change means that pensions will move from being largely outside inheritance tax to broadly inside it. Although the majority of estates will not be liable for inheritance tax due to the thresholds - such as the £325,000 nil-rate band and any applicable residence nil-rate band - estates that exceed these limits will form part of the taxable estate.
These changes are significant because they will have a marked impact on how people think about using their assets, particularly their pension savings, during retirement. Because many people have chosen to draw from non-pension assets first, if a pension becomes subject to inheritance tax, this could affect how much is passed on to beneficiaries.
It's important to emphasise that pensions can still be highly valuable for wealth transfer strategies. However, these changes mean retirement income plans, estate planning and other family wealth plans will need to be reviewed together, rather than separately. The value of investments, including pensions, can fall as well as rise, so you could get back less than you originally invested.
Example:
Let’s assume a married couple aged 65–69 with two children (so their estate can benefit from the residence nil rate band). The figures below illustrate their combined position on second death, assuming they have not made any significant lifetime gifts beyond the standard annual exemptions.
They have the following assets:
- A family home worth £800,000
- £350,000 in ISAs and investments
- £100,000 in cash savings
- Defined contribution pensions worth a collective total of £900,000, most of which remains untouched.
How inheritance tax could apply
Under current rules, most pension savings can typically be passed on outside of the estate for inheritance tax purposes. However, proposed changes from April 2027 may bring unused pension funds into scope.
| Before April 2027 | From April 2027 | |
|---|---|---|
Home, savings and investments | £1.25m | £1.25m |
Pension savings included for IHT | £0 | £900,000 |
Total estate potentially subject to IHT | £1.25m | £2.15m |
Available allowances | £1.0m | £1.0m |
Amount above allowances | £250,000 | £1.15m |
Illustrative IHT bill (40%) | £100,000 | £460,000 |
Increase in IHT | — | £360,000 more |
In this example, the couple’s combined £1 million allowance is made up of:
- £325,000 each standard nil rate band (£650,000 total), plus
- £175,000 each residence nil rate band (£350,000 total), available because they are passing their home to direct descendants
This gives a total of £1 million that can be passed on free from inheritance tax, assuming the allowances are fully available and not tapered.
This example has been simplified and is for illustrative purposes only and should not be relied on as a basis for making financial decisions. However, it should give you an idea of how these changes to the inheritance tax treatment of pensions could affect traditional wealth transfer strategies and how much can be passed on to future generations.
Who is most likely to be affected?
Not everyone will be impacted by these changes. However:
- If you have a larger pension pot and have preserved your pension assets for beneficiaries, you are more likely to be affected.
- People who have retired and have followed an income strategy based on the assumption that their pension wealth would be exempt from inheritance tax could also be affected.
- Individuals whose estates are already close to inheritance tax thresholds may also need to review how these changes could affect the overall value of their taxable estate.
Whether or not you are affected will depend on your personal circumstances, including the value of your assets and any reliefs or exemptions available to you.
What this change means for you
Although these changes do not take effect until April 2027, reviewing your plans now could give you more flexibility and ensure your arrangements stay aligned with your long-term goals. Any decisions about your pension or estate planning should be carefully considered, as they can have long-term implications.
Here are five tips to help you prepare for these changes:
- Review your pension beneficiary nominations - Ensure your nominations are up to date and still reflect your wishes, especially if your family circumstances have changed.
- Check your pensions and wills work together - Reviewing your pensions and will together can help ensure your estate plan reflects how you want your wealth to be distributed.
- Reassess your retirement income strategy - Consider the order in which you draw on your pension, ISAs and other savings during retirement.
- Consider using your annual gifting allowance - Lifetime gifting could help you support family members while potentially reducing the value of your estate and any associated tax liabilities.
- Review your overall estate structure - Look at your pension, savings, investments, property and other assets together to make sure your wealth transfer stays aligned with your long-term goals.
The most important takeaway is that many people will need to plan their retirements and inheritances together. Taking small steps now could also help you avoid having to make much more significant adjustments at a later date.
An adviser can help you understand how these changes may affect your retirement income plans, estate planning arrangements and long-term family goals.
You can book a free, no obligation call with one of our team today. There are no hidden fees or charges, and you’ll only pay if you choose to go ahead with the recommendations in your personalised financial plan.
Important information
This article is for information purposes only. It is not intended as financial advice.
Any views expressed are our in-house views at the time of publishing. This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.
