Pension Changes 2027 & Inheritance Tax
The pension you spent thirty years building tax-efficiently is about to be taxed twice.
From 6 April 2027, most defined-contribution pensions and death benefits are brought inside the estate for Inheritance Tax. For anyone who deliberately preserved their SIPP as an inheritance vehicle, the planning premise of the last decade is reversed.
The real problem
Since 2015, unused defined-contribution pensions have passed outside the estate for IHT. Die before 75 and beneficiaries received the pot tax-free. Die after 75 and they paid only income tax at their marginal rate as they drew it. For a generation of professionals, the advice was simple: leave the pension alone, spend other money first, and pass the pension on.
From 6 April 2027, that advice is wrong. Unused pension pots at death will form part of the estate for IHT purposes. On a £600,000 SIPP passing to adult children, the pension will first pay IHT at 40% (roughly £240,000), then the beneficiaries will pay income tax at their marginal rate on what they draw from what's left. The effective combined tax rate can approach 67%.
The pension that was your children's inheritance becomes, in large part, the government's.
What's changed
The change was announced in the Autumn 2024 Budget and confirmed in draft legislation in 2025. It applies to deaths on or after 6 April 2027. There is no transitional relief for existing pension pots.
Defined-benefit pensions in payment are largely unaffected. Death benefits from certain group life schemes may be treated differently. But for the typical SIPP, personal pension or drawdown pot, this is the rule going forward.
Executors will need to calculate the pension's value and include it in the IHT return. Where the pension is the largest asset in the estate, this creates a serious liquidity problem — because the pension itself may not be immediately accessible to pay the tax on it.
What this looks like in practice
A retired couple in their late sixties. Main home £900k, ISAs £200k, SIPPs of £500k each. Total estate: £2.1m. Under the current rules, IHT is calculated on £1.1m of non-pension assets — around £40,000 above the £1m combined allowances.
From April 2027, the pensions come in. Estate becomes £2.1m. Because it exceeds £2m, the Residence Nil-Rate Band starts to taper. IHT liability rises from around £16,000 to over £400,000.
The planning answer, for most couples in this position, is to draw down the pensions faster than the original plan assumed, use the surplus for lifetime gifts and gifts out of income, and put life cover in place to fund what tax cannot be avoided. The window to start the seven-year gifting clock is now — not April 2027.
Where you live matters less than you'd think
HMRC applies the same rules whether the pension is in Devon or Durham. What varies from one region to the next is asset value and family shape, not the tax code.
We work nationally by video call. Documents are signed remotely or couriered when wet signatures are needed. Almost every client we've helped with this problem in the last twelve months has never set foot in our office — and none of them received worse advice for it.
The local estate planner you were referred to may or may not have handled this specific situation before. The right question is not "are they nearby?" but "have they done this ten times?"
What we'd actually do
- 1
Understand the estate
A short, structured conversation about what you own, where it sits, and who is meant to receive it. No jargon and no product pitch. This alone often reveals the problem.
- 2
Estimate the potential exposure
We estimate the potential exposure — including the changes coming in 2026 and 2027 — and identify which areas need legal drafting, regulated advice, or tax input. You see the shape of the problem, not an assumption.
- 3
Design the plan in the right order
We tell you which two or three decisions move the needle, and which are decoration. Most estates need three or four things done properly, not everything.
- 4
Put it in place and review
Documents drafted, structures set up, life cover written into trust where relevant, and a review schedule so the plan tracks your life instead of gathering dust.
Common questions
Does this affect defined-benefit pensions?
Most defined-benefit pensions in payment are unaffected. Lump-sum death benefits from some DB schemes may be affected — this depends on the scheme's rules. Personal pensions, SIPPs and defined-contribution occupational pensions are the primary target of the change.
Should I start drawing my pension earlier?
For many people in their sixties with substantial pension pots, yes — the case for drawing down and gifting surplus is much stronger from 2025 onwards than it was three years ago. But this needs modelling against your income needs and tax position, not a generic rule of thumb.
What about life cover in trust?
Life cover written into a trust pays out to the trustees, doesn't enter the estate, and is not subject to IHT. For couples with large pension pots and no appetite to draw them down early, life-cover-in-trust is often the most efficient way to fund the future IHT bill.
Is there any chance the rules will be reversed?
The change has cross-party support and is embedded in the government's fiscal plans. Assume it will happen. Plan on that basis.
Two ways forward — pick the right lane
Some of what this page covers is drafted and delivered by IMS. Some needs a regulated adviser. Use the CTA that matches what you're actually asking for.
Regulatory notice. Inheritance Made Simple is not authorised or regulated by the Financial Conduct Authority. Where clients require regulated investment or pension advice, introductions are made to independently FCA-regulated advisers.
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