From 6 April 20 27, most unused pension funds and death benefits will be brought into a person’s estate for Inheritance Tax (IHT) purposes.
The change was first announced in the 2024 Autumn Budget, but with its introduction now only around six months away, those with substantial pension savings should be considering what it could mean for their estate.
It is expected that an additional 10,500 estates will become liable for IHT in 2027/28 as a result of the reforms, while a further 38,500 estates are expected to face a higher IHT bill.
The prospect of pensions becoming liable for IHT has already prompted some savers to act, with Financial Conduct Authority data showing that £91.2 billion was withdrawn from pensions during 2025/26, compared with £53.6 billion two years earlier.
How will pensions be treated for Inheritance Tax from April 2027?
From 6 April 2027, most unused pension funds and death benefits will form part of an individual’s estate when calculating IHT.
Transfers to spouses, civil partners and registered charities will continue to benefit from existing IHT exemptions.
However, pensions inherited by other beneficiaries could increase the value of an estate beyond the available tax-free thresholds and result in an additional tax liability.
This is particularly important while the IHT nil-rate band remains frozen at £325,000 and the residence nil-rate band stays at £175,000 until April 2031.
For families whose estates are already approaching these thresholds, bringing pensions within the scope of IHT could have a significant impact on the amount ultimately passed to beneficiaries.
Should I withdraw money from my pension before the changes?
The increase in pension withdrawals suggests that many people are already reconsidering how much wealth they retain within their pension.
Most savers can currently access their pension from the age of 55, although the normal minimum pension age is due to increase to 57 from 6 April 2028.
It is normally possible to take up to 25 per cent of a pension tax-free, subject to the lump sum allowance, which is currently £268,275.
However, withdrawing money from a pension will not automatically reduce your IHT exposure.
If the money simply moves from your pension into a bank account, it will remain part of your estate. You would generally need to spend or gift the funds for the withdrawal to reduce the overall value of your estate.
Gifting can provide an opportunity to pass wealth to family members during your lifetime, but the tax treatment needs careful consideration.
In many circumstances, gifts made within seven years of death can still affect the eventual IHT position, although exemptions may be available depending on the circumstances.
Taking money from your pension also means giving up the potential investment growth that those funds could have achieved, while reducing the money available to support you in retirement.
For this reason, withdrawing pension savings solely because of the IHT reforms may not always be the right decision.
Planning ahead of the Inheritance Tax pension reforms
There is no single approach to managing the forthcoming changes, as the right decision will depend on the value of your estate, your retirement requirements and what you ultimately want to pass on to your beneficiaries.
Working with a tax adviser alongside an independent financial adviser can help you understand the potential IHT exposure while ensuring that any decisions surrounding your pension do not compromise your own financial security.
With April 2027 getting closer, reviewing your estate now can give you more time to consider the options available rather than making significant financial decisions at the last minute.
