Pension Inheritance Tax 2027: What the IHT Changes Mean for Your Retirement Pot
From April 2027, pensions will be dragged into the Inheritance Tax net for the first time in their history. If you have a defined contribution pension — a personal pension, SIPP, or workplace scheme — it will count towards your estate for IHT purposes. The government is coming for money that, until now, sat entirely outside the taxman's reach after you died.
This is the largest structural change to pension taxation in a generation. It will affect millions of people who have done nothing wrong: they saved into their pension responsibly, they were told it would pass to their family tax-efficiently on death, and now the rules are being rewritten 11 months before the change takes effect.
The response most people are having — and the government is counting on — is panic and inaction. The correct response is to understand what is actually changing, work out whether it affects you, and take the right steps now while there is still time to plan around it.
Bankrolled's Grow pillar covers long-term wealth and investing in plain English. Our Protect pillar covers estate planning, insurance, and financial security. This article sits at the intersection of both.
How Pension IHT Works Today — The Current Rules
Under the rules that have applied since pension freedoms in 2015, defined contribution pensions are not part of your estate for Inheritance Tax purposes. They sit outside your estate. When you die, your pension fund does not trigger an IHT charge — it passes to your nominated beneficiaries free of IHT.
The tax treatment on death depends on your age:
- Die before 75: Your beneficiaries inherit your pension and can withdraw it completely tax-free. No income tax, no IHT. It is genuinely the most tax-efficient transfer of wealth available in the UK.
- Die at 75 or later: Your beneficiaries inherit the pension and can keep it growing within a pension wrapper, but when they draw from it, they pay income tax at their marginal rate. Still no IHT on the pot itself.
This made defined contribution pensions one of the most powerful estate planning vehicles in existence. Wealthy individuals deliberately left their pension untouched — drawing on ISAs, property, and other savings first — specifically to pass the pension pot to the next generation as an IHT-free inheritance. Financial advisers have been recommending exactly this for a decade.
The average UK pension pot is £61,000. But the distribution is heavily skewed. Many people in their 50s and 60s have pots well above £200,000 or £300,000, particularly if they benefited from final salary pension transfers or accumulated across multiple employers. These are the people most directly in the firing line.
What Changes From April 2027
From April 2027, unused defined contribution pension funds will be included in your estate for Inheritance Tax purposes. The pension pot is treated like any other asset — property, savings, investments — and added to the total estate value when calculating whether IHT is owed.
The existing IHT thresholds still apply:
- Nil-rate band: £325,000 per individual (frozen until at least 2030)
- Residence nil-rate band: Up to £175,000 if you leave your home to direct descendants
- Spousal exemption: Assets passed to a UK-domiciled spouse are still entirely exempt from IHT
- IHT rate: 40% on everything above your thresholds
The change does not create a new pension-specific tax rate. It simply removes the exemption that kept pensions outside the estate calculation. The pension pot joins the queue with everything else, and the 40% rate applies to whatever pushes the total above your threshold.
Crucially, the income tax rules on death remain. Your beneficiaries will still pay income tax when they draw from an inherited pension (if you die at 75 or older). The combined effect — IHT on the pot plus income tax on withdrawal — can result in an effective tax rate well above 50% on inherited pension funds for beneficiaries in higher tax brackets.
HMRC and the pension scheme administrators will also need to coordinate IHT payment, which has created significant concern about liquidity — the pension trustee will be responsible for paying IHT, potentially before the beneficiary has actually received any money. The mechanics are still being consulted on.
Who Is Actually Affected — Worked Examples
The framing you will see in some coverage — "this only hits the wealthy" — undersells the reach of this change. With pension pots and property values both having risen significantly over the past decade, a surprisingly large number of ordinary retirees will find themselves above the threshold.
Example 1: The Couple With a House and a Pension
Margaret, 68, is widowed. She owns her home outright, worth £310,000. She has a defined contribution pension pot worth £180,000 and £45,000 in savings. She has never thought of herself as wealthy.
| Asset | Value |
|---|---|
| Property | £310,000 |
| Pension pot (from April 2027) | £180,000 |
| Savings | £45,000 |
| Total estate | £535,000 |
Margaret's nil-rate band is £325,000. Her residence nil-rate band (leaving the home to her two children) is £175,000. Total threshold: £500,000. Taxable estate: £35,000. IHT due: £14,000.
Before April 2027, her pension pot was outside the estate. Total estate without the pension: £355,000. After applying the £500,000 threshold, IHT owed: zero. The pension change converts a zero IHT bill to a £14,000 IHT bill. That money comes out of what her children inherit.
Example 2: Someone Who Left Their Pension Untouched
David, 72, has a SIPP he was deliberately not drawing from, following his financial adviser's estate planning strategy of the past decade — use the ISA and savings first, preserve the pension as an IHT-free gift. His estate:
| Asset | Value |
|---|---|
| Property | £420,000 |
| SIPP | £350,000 |
| ISA | £80,000 |
| Savings | £30,000 |
| Total estate | £880,000 |
David is married. He can leave everything to his wife IHT-free via the spousal exemption, and she inherits his unused nil-rate band and residence nil-rate band too — giving her a £1,000,000 combined threshold. They are fine for the first generation.
But when his wife dies, the full £880,000 estate (potentially grown further) passes to their children. If his wife's estate is similar in size, the combined inherited estate could be well above £1,000,000 — and the SIPP is no longer a clean IHT vehicle. The estate planning strategy David was sold no longer works as intended. Everything needs reviewing.
Example 3: The Single Person Just Over the Threshold
James, 60, is unmarried. He has a property worth £285,000, a pension pot worth £95,000, and savings of £20,000. Total estate including pension: £400,000. His nil-rate band: £325,000 (no residence NRB — he's leaving the house to his sister, not a direct descendant). Taxable estate: £75,000. IHT: £30,000.
Before April 2027, the pension is outside the estate. Total estate: £305,000. IHT: zero. The change costs his family £30,000. That is not a marginal rounding error — that is a significant sum for a household with a moderate pension and a modest house.
What To Do Now — The Practical Options
The instinct when a tax change is announced is to act immediately and dramatically. That is usually wrong. The right approach is methodical: understand your exposure, weigh the options, and make changes that make sense for your overall financial position — not just for the IHT optimisation in isolation.
Option 1: Draw Down Your Pension Faster
The IHT change creates a new incentive to use your pension during your lifetime rather than preserving it as an inheritance. Drawing your pension down reduces the pot that will be subject to IHT on death.
This is not automatically the right answer. If you draw pension income, you pay income tax at your marginal rate. You need to compare:
- Income tax on drawdown now: 20%, 40%, or 45% depending on your total income
- IHT on the pot at death: 40% of the pot above your threshold
- Plus income tax your beneficiaries would pay on inherited drawdown: at their marginal rate (if you die at 75+)
For basic rate taxpayers with modest pensions, drawing more now may be tax-efficient compared to the combined IHT + beneficiary income tax on death. For higher rate taxpayers with large pots, the calculation is much less clear — drawdown just swaps one tax for another, possibly at the same or higher effective rate.
The key is to model your specific numbers, not apply a blanket rule. A financial adviser can run the drawdown modelling for you with your actual numbers and circumstances.
Option 2: Spend Down Pension Income on Reducing Other Taxable Estate
If you draw from your pension, you can use the income to reduce other IHT-exposed assets rather than accumulating more savings. Gifting is the most commonly used mechanism: you can give up to £3,000 per year per year as "annual exemption" gifts without any IHT consequences. Larger gifts are covered by the "7-year rule" — they potentially fall out of your estate entirely if you survive 7 years after making them.
Draw from the pension → pay income tax → gift the after-tax proceeds to children → the gifted amount leaves your estate (eventually). It is not clean or instant, but it can meaningfully reduce the estate over a 5-10 year horizon.
Option 3: Consider an Annuity for Part of Your Pension
Annuities died in popularity after pension freedoms in 2015. They may have a partial revival in the post-April 2027 world. Annuities convert a lump sum pension pot into a guaranteed income stream for life. The key IHT point: once you buy an annuity, the lump sum is gone — it no longer sits in your estate as an unused pension fund.
You trade a pension pot (which from 2027 is an IHT-exposed asset) for a guaranteed income (which is spent and therefore not in your estate). If you need the income anyway, an annuity for part of your pension achieves two things: certainty of income and removal of that slice of the pot from the IHT equation.
Annuities are complex and irreversible. The right size, type, and timing depends heavily on personal circumstances, health, and longevity expectations. Do not buy one without independent financial advice.
Option 4: Review Your Pension Nominations
Even under the new rules, how you nominate pension beneficiaries matters. Spouses and civil partners still benefit from the spousal IHT exemption on assets passing directly to them. Pension nominations should be reviewed to ensure they reflect your current intentions and family structure — and to make sure you have actually completed them. Many people have outdated or missing nominations.
Your pension provider holds a nomination of beneficiaries form (or a letter of wishes). This is not legally binding — the trustee makes the final decision — but in practice trustees almost always follow the nomination. Review it annually. Make sure it is current. Make sure your pension provider has the right people listed.
Option 5: Gifting Strategies Beyond the Pension
The pension change is often the trigger for a broader review of estate planning. The standard gifting tools still apply and are worth understanding:
- Annual exemption: £3,000 per year per person. Unused allowance can carry forward one year. A couple can gift £12,000 per year between them using current and carried-forward allowances.
- Small gifts exemption: £250 per person per year to any number of individuals.
- Normal expenditure out of income: Gifts made from regular surplus income (not capital) can be exempt from IHT if they meet HMRC criteria — potentially very significant for retirees with healthy pension income.
- 7-year rule gifts: Larger gifts start a 7-year clock. If you survive 7 years, they fall entirely outside the estate. If you die before 7 years, taper relief reduces the IHT progressively.
The Psychology of This Change — And Why Inaction Is the Trap
The announcement of the pension IHT change triggered headlines about "the government raiding your pension." That framing is emotionally accurate — it does feel like a raid — but it can push people into one of two unhelpful directions: panic-selling their pension or doing nothing at all.
Panic-selling is wrong. Pulling your pension out entirely, withdrawing large sums immediately, or making sudden irreversible changes (like annuity purchases) without proper analysis frequently costs more in income tax than the IHT it was trying to avoid. Emotional responses to tax changes almost always lose money.
Doing nothing is also wrong. The 11-month window between now and April 2027 is genuinely useful planning time. The people who will be hurt most are those who do not review their position, find out in 2028 that their estate has a significant IHT liability, and have run out of options.
The correct emotional frame is: this change affects a lot of people, it is real, the impact is calculable, and there are legitimate planning strategies available right now. The question is whether you take the time to understand your position and act appropriately — or whether you wait, let the change arrive, and deal with consequences that are harder to manage retroactively.
Loss aversion is powerful here. "The government is taking my pension money that I saved for my family" is how this feels. That feeling is valid. The productive response to that feeling is to act rationally — not impulsively.
When You Need a Financial Adviser
Pension planning interacts with income tax, Inheritance Tax, Capital Gains Tax, state benefits, and family circumstances in ways that are too complex to model without professional help if your situation has any real scale to it.
You almost certainly need independent financial advice if:
- Your combined estate (including pension) is above £500,000
- You have a large SIPP or personal pension above £150,000 that you have not yet drawn from
- You previously got advice to leave your pension untouched for estate planning purposes
- You have business assets, property, or complex family structures (trusts, second marriages, stepchildren)
- You are approaching the Lifetime Allowance or have pension protection in place
- You are considering an annuity purchase for IHT reasons
The Unbiased adviser matching service connects you with regulated, independent financial advisers who can review your full estate position and model the impact of the April 2027 changes on your specific numbers. This is not a job for a generic comparison site — it requires someone who will look at your actual situation.
Find a financial adviser on Unbiased →
If your situation is more straightforward — moderate pension, wanting to understand the rules rather than plan around them — the Pension Wise service (free, government-backed) offers appointments for those over 50 to discuss pension options. It is not financial advice, but it is a useful starting point.
Platforms for Managing Your Pension
If you are reviewing your pension position as a result of the April 2027 changes, it is also worth checking whether your pension is in the right place. Many people have old workplace pensions scattered across multiple providers — consolidation can make planning easier, reduce fees, and give you a clearer picture of your total pot.
| Platform | Best For | Min Investment | Learn More |
|---|---|---|---|
| Hargreaves Lansdown | SIPP with wide fund choice, established platform | £100 | HL SIPP |
| AJ Bell | Lower fees, integrated ISA + pension view | £500 | AJ Bell SIPP |
| PensionBee | Pension consolidation, app-first, simple | £1 | PensionBee |
Hargreaves Lansdown
Hargreaves Lansdown's SIPP is the UK's most widely used self-invested personal pension. You have access to thousands of funds and shares, a well-regarded mobile app, and robust customer service. It is not the cheapest for large pots (the 0.45% platform fee is uncapped on pension assets, unlike the ISA), but the breadth of investment choice and platform quality justify the cost for many investors. If you are consolidating multiple old workplace pensions into one SIPP for planning purposes, HL is a safe choice.
AJ Bell
AJ Bell's SIPP charges 0.25% on the first £500,000 (capped at £125/year for shares), making it meaningfully cheaper than HL for larger pension pots. The integrated view of ISA, LISA, and pension across one account is genuinely useful when you are trying to understand total estate exposure. AJ Bell also offers a good range of managed ready-made portfolios alongside DIY investing — useful if you want to set and forget while the big planning decisions are being worked through with an adviser.
PensionBee
PensionBee specialises in pension consolidation — tracking down and combining your old workplace pensions into one simple plan. If you have lost track of previous pensions, or want to see your total pension in one place before working out your IHT exposure, PensionBee is the most straightforward path. Their plans are managed by major institutions (BlackRock, Legal & General, State Street) and fees are transparent and competitive for smaller pots.
The Bottom Line
The April 2027 pension IHT change is real, it is significant, and it affects a larger proportion of UK households than the government's framing suggests. The average pension pot of £61,000 sounds modest — but many retirees in their 60s and 70s have pots of £150,000, £250,000, or more, sitting alongside homes that have risen substantially in value. The interaction between pension, property, and the frozen nil-rate band creates an IHT exposure that simply did not exist before this change.
The options available to you depend entirely on your circumstances. Drawing down faster makes sense for some. Gifting strategies make sense for others. Annuity purchases may make sense for a few. Doing nothing — hoping the rules will change back, or ignoring the issue until it is too late — almost never makes sense.
The 11 months between now and April 2027 are planning time. Use them.
Immediate steps:
- Review your pension nominations — make sure the right people are listed
- Estimate your total estate including your pension pot
- Work out your IHT threshold (nil-rate band + residence nil-rate band if applicable)
- If you are above the threshold or close to it, book a consultation with an independent financial adviser via Unbiased
- Check whether your pension is consolidated and visible — platforms like PensionBee make this straightforward
Explore more on our Grow and Protect pillars — covering long-term financial planning, ISAs, estate strategy, and the decisions that compound over time.
This article is for information purposes only and does not constitute financial advice. Tax rules are subject to change. The April 2027 IHT changes are based on legislation and consultation documents current at the time of writing — verify the latest position at gov.uk before making decisions. Where pension or inheritance tax planning is involved, independent regulated financial advice is strongly recommended.