Over the last few months, we’ve examined the proposed changes to Inheritance Tax (IHT) and pensions, as speculation around these has grown. At the time, many of those changes were still under review.
Now they’ve been confirmed.
The government has officially announced that from 6th April 2027, defined contribution pension pots will be brought within an individual’s estate and therefore in scope of IHT when passed on after death. This marks a potentially significant shift in estate planning strategy for many families, especially those who have relied on pensions as a tax-efficient way to transfer wealth.
While we await the final legislation for technical consultation from the government (due by the end of September 2025), this could be a good opportunity to re-evaluate your plans and consider how the new rules might impact your estate, and what you can do now to stay in control.
The change: pensions and Inheritance Tax
Under current rules, when someone dies after age 75 with money left in a defined contribution pension, that pot is typically subject to income tax at the beneficiaries’ marginal rate, but not IHT. However, if someone dies under age 75, there is no IHT payable, and no income tax applies either. This has previously made pensions a powerful estate planning tool.
From April 2027, any remaining defined contribution pension savings will be included within the deceased’s estate for IHT calculation purposes. If the total value of the estate exceeds the available nil-rate band, a 40% tax could apply, including the pension funds.
Who needs to be aware?
You should consider reviewing your financial plan if:
- You have a defined contribution pension, either personal or through your employer,
- You were planning to leave your pension pot untouched, with the aim of passing it on, or
- Your estate could exceed the IHT threshold of £325,000 (or £500,000 if the residence nil-rate band applies).
Until now, a sensible approach for some might have been drawing down other investments first in retirement and leaving pensions intact for inheritance purposes. That logic is beginning to shift. Without updated planning, an individual’s estate may face an unexpected IHT bill on funds that were once considered exempt.
According to HMRC figures, Inheritance Tax receipts have been rising steadily in recent years. With pension wealth set to be included from 2027, that trend is expected to continue as more estates fall within the scope of the tax.
What to do between now and April 2027
Although the reform doesn’t take effect until 6th April 2027, the planning window is already open, and the sooner you act, the more flexibility you’ll probably have.
Revisit your retirement withdrawal strategy
If you’ve been prioritising other investments and leaving your pension untouched, this approach might need a rethink. Drawing more from your pension during your lifetime could help reduce your estate’s value and, in turn, your future IHT liability.
Understand your potential exposure
To get a clearer picture of how the 2027 rules might affect you, try our Inheritance Tax (IHT) Calculator. It gives a helpful estimate of what your estate could owe under the new regime, so you can plan accordingly.
Explore your planning options
If you’d like to dive deeper into strategies for protecting your estate, our Inheritance Tax (IHT) Guide covers practical steps such as gifting, life insurance, and long-term wealth planning. It’s free to download and a great place to start before speaking to an independent financial adviser.
Flying Colours Advice can help you prepare
Many people are already starting to revisit their estate plans in light of the April 2027 Inheritance Tax changes. Now that the reform has been confirmed, it’s a good time to take stock and consider whether your current approach still aligns with your goals.
At Flying Colours Advice, we offer practical, personalised support to help you navigate these changes with confidence. That might involve reviewing how your pension fits into your wider financial plan, exploring intergenerational planning options, or thinking through how to balance flexibility with long-term tax efficiency. If you’re unsure what your exposure to Inheritance Tax might look like, our IHT calculator is a useful starting point.
Everything we do is designed to help you make informed decisions clearly, calmly, and without pressure.
Looking ahead
The inclusion of pension pots in the Inheritance Tax calculation from 2027 will come as a surprise to many. But by planning ahead, it may be possible to reduce the impact and ensure more of your wealth is passed on in the way you intended.
If you’d like to explore your options, you can book a free discovery call with our team.
Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or Will writing.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.