The 2027 Pension and Inheritance Tax Changes: What UK Families Need to Do Now

What Is Changing for Pensions in 2027

Most UK families assume their pension is the one part of their financial life that will pass to the next generation cleanly. They believe this because they are:

• Contributing steadily into a workplace or personal pension
• Naming their children or spouse as beneficiaries
• Treating the pension as money set aside for later life, not for tax
• Relying on the long-standing position that unused pensions sat outside inheritance tax

For many years, that assumption was reasonable. It is also where the gap is about to open.

From 6 April 2027, the position changes. This article explains what is changing, who it is likely to affect, and why the period between now and then is when the most useful planning decisions can be made.

These changes are now law. The Finance Act 2026 received Royal Assent on 18 March 2026, and the reform applies to deaths on or after 6 April 2027. From that date, most unused pension funds and pension death benefits will be brought within the value of the estate for inheritance tax, with some operational details still subject to further regulations and HMRC guidance. In practical terms, the value of a pension that has not been used by the time of death will, in most cases, be added to the rest of the estate when inheritance tax is calculated.

The word that matters here is unused. The change is not aimed at the income you draw and spend during retirement. It is aimed at the funds that remain in a pension at the point of death, along with certain death benefits payable from it. Money already taken out of the pension is treated like any other asset in the estate.

This is a meaningful shift. Until now, most defined contribution pension pots have generally been able to pass to beneficiaries without an inheritance tax charge. That has made the pension a useful way to hold wealth that could pass on efficiently, and some families have deliberately drawn on other savings first for exactly that reason. From 2027, that advantage narrows considerably, and the logic behind those decisions may need to be revisited.

Not everything is affected. Based on the rules as currently set out:

• Death-in-service benefits paid from a registered pension scheme remain outside the new rules
• Dependant’s scheme pensions from defined benefit or collective money purchase arrangements are excluded, meaning ongoing payments to a surviving spouse, civil partner or financially dependent child
• Transfers to a surviving spouse or civil partner who is a long-term UK resident remain covered by the existing spousal exemption

The detail still matters, and your own position should be confirmed against your specific schemes. But the broad direction is clear. The pension is no longer a reliable way to keep wealth outside an estate.

Residency matters here too, which is particularly relevant for anyone who has worked abroad or expects to return to the UK. Long-term UK residents may be within scope for registered pension schemes, qualifying non-UK pension schemes and section 615(3) schemes, regardless of where the scheme itself is situated. People who are not long-term UK residents are treated differently. If your working life has spanned more than one country, your residency position is one of the first things worth confirming, because it shapes which of your pensions the new rules reach.

Why This Is Not Only a Concern for Wealthy Families

It is tempting to read the words inheritance tax and assume the change applies to someone else. For a growing number of households, that assumption may no longer hold.

Inheritance tax is charged at 40% on the value of an estate above the available nil-rate bands. The standard nil-rate band is £325,000. Where a main residence passes to direct descendants, a residence nil-rate band of up to £175,000 may also be available. Together, that can allow up to £500,000 to pass free of inheritance tax for an individual, or up to £1,000,000 for a married couple or civil partnership where both sets of allowances are combined.

Those figures can sound generous until a typical estate is added up:

• A family home, after years of rising property values
• Cash savings and ISAs
• Investments held outside a pension
• Life policies that are not written into trust
• And, from 2027, the unused pension itself

Illustrative example. Consider a married couple in their seventies. Their home is worth around £600,000. They hold £150,000 in ISAs and cash, £80,000 in other investments, and one partner has a defined contribution pension of £300,000 that has not been drawn. Under the rules before 2027, that pension would generally have sat outside the estate. From 2027, on the second death, the pension is expected to be counted alongside everything else, producing a combined estate of roughly £1,130,000 to be measured against the couple’s allowances. This example is illustrative only. The actual position of any family depends on how assets are owned, who inherits and the allowances available, which is why a calculation based on your own figures is worthwhile.

There is a further point that is easy to miss. Where an estate is valued at more than £2,000,000, the residence nil-rate band is gradually reduced, by £1 for every £2 above that figure, and can be lost entirely on larger estates. Because adding an unused pension increases the size of the estate, it can in some cases push an estate past the £2,000,000 line and reduce the residence nil-rate band at the same time. The pension is then affecting the calculation twice over.

HMRC has estimated that around 10,500 estates will become liable for inheritance tax in the 2027 to 2028 tax year that would not have been liable under the previous rules. The change does not only reach large estates. It can reach ordinary families whose wealth happens to include a home and a pension.

The thresholds themselves are part of the picture. The nil-rate band and residence nil-rate band are currently frozen at their existing levels until April 2031. Because the thresholds do not rise while asset values often do, more estates can be drawn above the line each year, even when nothing about a family’s circumstances has changed. This is one example of the way frozen allowances quietly pull more estates into scope over time, often without anyone noticing until an estate is being settled.

When the Same Pension Can Be Taxed Twice

One of the most important, and least understood, features of the 2027 change is that inheritance tax may not be the only charge that can apply to a pension.

Where a pension holder dies at or after age 75, the existing income tax rules on inherited pensions continue to apply. That means a beneficiary who draws money from the inherited pension may pay income tax on those withdrawals, at their own marginal rate, which can be up to 45%.

HMRC has indicated that mechanisms will be in place to prevent income tax being charged on the portion of relevant death benefits equal to the inheritance tax due on that pension. The remaining inherited pension, however, may still be subject to income tax when it is drawn.

From 2027, that income tax charge could sit alongside an inheritance tax charge on the same pension. Where both apply, the combined effect can be significant. Independent commentators have estimated that, in certain circumstances, the combined effective rate on an inherited pension could reach the mid-60% range for a higher-rate or additional-rate beneficiary.

It is important to be precise here. Whether both charges apply, and at what level, depends on a number of factors:

• The age of the pension holder at death
• The marginal income tax rate of the beneficiary
• The size of the estate relative to the available nil-rate bands
• The structure of the specific pension scheme

This is not a fixed outcome that applies to every family. It is a risk that can apply in particular circumstances, and for many families it will not arise at all. But it is a risk worth understanding, because the planning decisions that may reduce it tend to be more effective when they are considered early rather than late.

What the 2027 Change Does Not Do

It is just as important to be clear about what this change does not mean, because anxiety can be as unhelpful as complacency.

The 2027 change does not:

• Tax your pension while you are alive and drawing it normally
• Apply a 40% charge to the whole of every pension regardless of estate size
• Remove the spousal exemption, which continues to protect transfers between spouses and civil partners
• Affect death-in-service cover or the excluded dependant’s scheme pensions
• Mean that emptying your pension quickly is automatically the right response

For many families, the practical outcome will be a modest adjustment rather than a wholesale rethink. For others, particularly those with larger pensions and estates already close to the thresholds, the change is more significant. The only way to know which group you are in is to look at your own numbers rather than the headlines.

It is also worth remembering that the pension remains, first and foremost, a way to fund your own retirement. Its purpose has not changed. The 2027 reform affects what happens to whatever is left, not the value of the pension to you while you are living on it. A measured review that holds both of those facts in view tends to be far more useful than a reaction to a deadline.

The Planning Toolkit That Remains Available

The 2027 change narrows one route, but it does not close off planning altogether. Several long-standing tools remain available, and their relative value tends to increase, not decrease, as the change approaches.

Spousal planning remains a starting point for many couples. Transfers between spouses and civil partners remain free of inheritance tax where both are long-term UK residents. For many couples, the first useful step is simply understanding how allowances pass on first death, and how to avoid wasting them. Wills and beneficiary nominations may need to be reviewed so that they still work sensibly under the new rules.

Gifting rules were left unchanged at the Autumn Budget 2025. That means the established options remain in place:

• The annual exemption of £3,000 per person each tax year
• Small gifts of up to £250 per recipient each tax year
• Regular gifts made out of surplus income, where they do not affect your normal standard of living
• Larger gifts to individuals, treated as potentially exempt transfers, which fall outside the estate if you survive for seven years

Gifting is rarely about giving everything away. It is about using the allowances available, in a way that does not compromise your own security in later life.

Pension withdrawal strategy becomes a planning question rather than only a retirement-income question once pensions sit within the estate. For some families, drawing and using, or gifting, pension money during retirement may be worth considering rather than leaving the pension untouched. For others, doing so could create an unnecessary income tax charge or leave too little for later life and care costs. Whether it is appropriate depends entirely on your income needs, your assumptions about later life, and your wider assets. This is why the order in which different pots are drawn down in retirement is best treated as a conversation rather than a fixed rule.

Protection cover can also have a role. Life insurance written into an appropriate trust may provide a lump sum to help meet an inheritance tax bill, so that beneficiaries are not forced to sell assets or draw heavily on an inherited pension to pay it. This does not reduce the tax itself, but it can change how, and how comfortably, the tax is paid. It is part of the role protection cover plays as a foundation rather than an afterthought in a well-built plan.

None of these tools is universally right. Each depends on individual circumstances, and each carries its own considerations and trade-offs. The common thread is timing. Most of them tend to work better the earlier they are considered.

Why the Period Before April 2027 Matters

It is easy to treat 2027 as a distant date. In planning terms, it is closer than it looks.

• Potentially exempt transfers only fall fully outside the estate after seven years
• Trust arrangements take time to establish and should not be rushed
• Pension withdrawal decisions are often best spread over several tax years rather than compressed into one
• Protection cover depends on health and age, both of which tend to move in only one direction

The families who navigate this change most comfortably are rarely the ones who act in early 2027. They tend to be the ones who review their position now, while the full range of options is still open.

That review does not need to lead to immediate action. Often the first outcome is simply clarity: a clear picture of the estate, an understanding of which pensions are in scope, and a sense of which decisions are time-sensitive. From there, any changes can be made calmly and in sequence rather than under pressure.

How Professional Planning Support Actually Fits

For UK families, professional planning tends to be most valuable when it does the following.

• Looks at the whole estate, rather than the pension in isolation
• Sequences decisions so that gifting, withdrawals and protection work together rather than against each other
• Tests assumptions about income needs and later life before money is moved
• Keeps flexibility, so a plan can adapt if rules or circumstances change again
• Coordinates with your wider professional advisers, including your solicitor and accountant

The 2027 change is not a single decision to be made once. It is a set of linked decisions that are easier to get right when they are looked at together, and easier still when there is time to let them work.

This is why families facing the 2027 changes often seek a conversation, not a product.

The Soft But Decisive Next Step

If you are reading this and thinking:

• I always assumed the pension would pass on cleanly
• I am not sure whether our estate is actually over the threshold
• We have savings, a home and pensions, but no clear picture of the total
• I do not want my family to face a bill that nobody planned for

then the next step is usually a structured conversation focused on clarity, not implementation. Not because 2027 is an emergency, but because the period before it is the rare window in which calm, unhurried planning is genuinely possible.

Final Takeaway

The 2027 pension and inheritance tax change is not about:

• Panic decisions made against a deadline
• Assuming the worst possible outcome applies to everyone
• Treating the pension as a problem rather than an asset

It is about:

• Understanding how your estate is likely to be assessed under the new rules
• Knowing which of your pensions and benefits are in scope
• Using the planning tools that remain available, in good time
• Making linked decisions in a sensible order

Many families only discover the cost of leaving this late when an estate is being settled and the options have already closed. Those who review it early, calmly and as a whole rarely regret having done so.