From April 2027, most pensions will be brought within the scope of UK inheritance tax - a fundamental shift in how pension wealth is treated on death. For those with substantial pensions, the strategy of leaving a pot intact for the next generation requires further thought. We set out what is changing and the strategic options now worth considering.
For the past 11 years, defined contribution (“money purchase”) pensions have occupied a uniquely favourable position in UK estate planning.
While assets in an individual’s estate could be subject to inheritance tax (IHT) at 40% above the available nil-rate bands, since 2006 a pension – in the event of many pension members dying below age 75 - could pass to any beneficiary free of inheritance and other taxes. The funds inside the pension continued to grow free of income tax and capital gains tax. For HNW clients with substantial wealth, there was an obvious strategy: minimise pension drawings as much as possible to accumulate gross for future generations.
That position is changing. From 6 April 2027, most defined contribution pension funds will be brought within the scope of inheritance tax on death where there is no remaining spouse or civil partner. Other pension tax advantages such as tax relief on contributions and exemption from income tax and capital gains tax on the assets inside the wrapper remain in place. On death however, the pension will be valued and added to the deceased's estate for inheritance tax purposes, in much the same way as any other asset.
This is a fundamental change. Benefit drawing strategies that were tax-efficient under the pre-2027 regime are no longer optimal, and in some cases should be modified to retain tax efficiency. Wills, pension nominations and lifetime planning all need to be reviewed together rather than in isolation.
What is changing in April 2027
In summary:
- Most defined contribution pensions will be brought within the inheritance tax net on the death of the pension member and his/her spouse or civil partner. This applies whether the pension is in drawdown or untouched.
- Funds remaining in pension schemes will be added to the deceased's estate for the purposes of calculating inheritance tax due.
- The spouse exemption will continue to apply. Pension assets passing to a surviving spouse or civil partner will remain exempt from inheritance tax, in the same way as other assets passing to a spouse.
- Separately, the income tax position on death benefits continues to operate. Where the pension member dies before age 75, beneficiaries can usually draw the funds free of income tax. Where the pension member dies on or after age 75, beneficiaries pay income tax at their marginal rate on funds drawn depending on their tax residency. This income tax position is unchanged by the 2027 reforms.
The combination of inheritance tax (potentially 40% on the pension fund above the available nil-rate bands) and income tax on drawdown for post-75 deaths can produce effective tax rates on inherited pension wealth of up to 67%. That top headline figure is lower than the 82% rate which applied pre April 2015 but does not need to be incurred.
Some categories of pension schemes, particularly defined benefit pensions and certain pre-existing structures fall outside the scope of the new rules. The detail of what is and is not in scope continues to be subject to consultation and finalisation, and any individual pension structure should be reviewed individually.
Why previous strategies may no longer apply
Under the pre-2027 regime, the pension itself fell outside the scope of inheritance tax, so, leaving a large pension pot to children or grandchildren was an efficient way to pass meaningful wealth down a generation. Other assets in a personal estate such as investment portfolios, property, business interests needed to be drawn down or restructured for inheritance tax efficiency during the lifetime of an individual, while his/her pension could be preserved.
Under the post-2027 regime, that approach changes:
- A pension fund is no longer outside the inheritance tax net. So, for example, a £1.5m fund say passing to children will, all other things being equal, attract the same 40% inheritance tax charge that any other asset would attract above the available nil-rate bands. Of course, the difference is that the pension scheme is the only asset that has been accumulated tax free with tax relief on the original sums invested.
- For deaths on or after age 75, the layered income tax charge on beneficiaries' drawdown means the effective tax rate could be substantially higher than 40%.
- The historic "preserve the pension intact and spend other assets" strategy does not now deliver the intended result automatically.
For couples where one or both spouses hold substantial pensions, the practical question becomes: how should the overall family wealth - pension and non-pension - be structured to minimise total tax exposure across both deaths, and to provide for children or grandchildren in the most efficient way subject to any required protection or control?
Alternative responses - gift during lifetime and leave both the estate and the pension to the surviving spouse
Where there is a surviving spouse/civil partner there are four straightforward steps to consider.
Step 1 - lifetime gifts
For pension members who have surplus income, there is an opportunity to begin moving wealth out of the estate now during their lifetime rather than waiting till death. The member can make use out of the “gifts out of normal income” exemption. It allows unlimited gifts from a donor's income to be made free of inheritance tax, provided three conditions are met: the gifts are made out of income (not capital); they form part of a regular, established pattern; and they leave the donor with sufficient income to maintain their usual standard of living.
Pension drawdown income, taken regularly, can qualify as "income" for these purposes. For a pension holder whose pension is meeting more than their lifestyle needs, the surplus drawdown can be gifted directly to children, grandchildren or other beneficiaries on a recurring basis which could be typically monthly, quarterly or annually and those gifts will fall outside the donor's estate for inheritance tax purposes from the moment they are made. There is no seven-year survival period to wait out as there is with a potentially exempt transfer.
To benefit from the exemption, the gifting pattern must be evidenced - typically through records of the income source, the gifts made, and confirmation that the donor's standard of living has not been affected.
Step 2 - direct both estate and pension to the surviving spouse
The Will is structured to leave the residuary estate (or as much of it as is consistent with the family's wider wishes) to the surviving spouse outright. The pension nomination is updated to direct death benefits to the surviving spouse. Both transfers attract the spouse exemption and are therefore free of inheritance tax on the first death.
The result is that the surviving spouse holds the combined family wealth, including the pension. Inheritance tax has been deferred although not eliminated until the second death. There could be family problems to consider if the surviving spouse is a second spouse
Step 3 - draw on capital or income from the pension during the survivor's lifetime
The surviving spouse can draw on the pension during their own lifetime, either by way of regular drawdown income or by drawing on capital as appropriate to their circumstances. Two points are worth making here:
- The pension wrapper itself remains tax-efficient. Inside the pension, the assets continue to grow free of income and capital gains taxes - a meaningful structural advantage that does not change in 2027. For wealth that is being preserved, the pension remains one of the most tax-efficient holding vehicles available in UK law.
- Funds drawn from the pension are subject to income tax at the survivor's marginal rate (where the original pension holder died on or after age 75) or are free of income tax (where they died before age 75). Drawdown strategy needs to take this layered position into account.
Step 4 - gift drawn funds during the survivor's lifetime
Where the survivor's own resources are sufficient to maintain their lifestyle, funds drawn from the pension can be gifted during the survivor's lifetime to children, grandchildren or other beneficiaries. Two principal routes are commonly used:
- Potentially exempt transfers (PETs). Outright lifetime gifts that fall outside the survivor's estate for inheritance tax purposes if the survivor lives for seven years after making the gift. PETs are flexible and can be substantial, but they carry the seven-year survival risk.
- Gifts out of normal income. As discussed in Step 1, this exemption can also be used by the surviving spouse on the same principles
The combined effect of this four-step approach is that:
- No inheritance tax is paid on the first death (spouse exemption);
- The pension wrapper remains tax-efficient during the survivor's lifetime;
- Funds drawn from the pension are gradually moved out of the survivor's estate during their lifetime, either as PETs or as gifts out of normal income, reducing the inheritance tax exposure on the second death.
Whether this strategy is suitable depends on the specific circumstances of the family including the ages and health of the spouses, the relative sizes of the pension and non-pension wealth, the income needs of the surviving spouse, the pattern of income from the pension, and the family's wider planning objectives. It is one option among several and is set out here to illustrate the kind of structural rethink that the 2027 changes invite.
Why the pension structure still matters
It is worth emphasising what the 2027 changes do not affect. Inside the pension, the position remains as it was:
- No income tax on investment income generated by assets held within the pension wrapper;
- No capital gains tax on gains realised within the pension wrapper;
- Continued tax relief on contributions, within the applicable annual and lifetime limits.
For HNW clients, this is significant. Even after the 2027 changes, the pension remains one of the most tax-efficient long-term holding vehicles available.
A wider point - strategy in an unsettled tax landscape
It is also worth noting a wider point. The 2027 pension reforms are one example of a broader pattern: UK estate planning is currently operating against a backdrop of continual Government changes to the tax landscape. The shift to a residence-based regime in April 2025, the reform of Business Property Relief in the 2024 Autumn Budget, the changes to non-dom taxation, and now the pensions reforms are all examples of a tax landscape in which the rules have changed materially in successive Budgets and may yet change again under the Labour government with a different chancellor.
The Autumn 2026 Budget will be delivered against a backdrop of evolving political priorities, and continuing domestic and global uncertainty. It is genuinely not clear at this stage what changes that Budget or its successors will bring, or even who will be delivering them. The 2027 pension reforms are themselves still subject to consultation and could be modified before they take effect.
What follows from this is to take regular review. In a more stable tax environment, an HNW estate plan could reasonably be reviewed every five years, or on a material change in family circumstances. In the current environment, that cadence is not enough. The right approach is:
- Establish a strategy based on the rules as they currently stand and as they are known to be changing;
- Build in flexibility through properly-structured Wills, considered use of trusts, regular review of pension nominations, and disciplined documentation of any gifting strategy so that the plan can be adjusted as the rules evolve;
- Review regularly ideally annually for clients with substantial wealth (in their estate or their pension), and certainly after any Budget that touches on inheritance tax, pensions, capital gains or domicile/residence rules.
The strategy that looks optimal in 2026 may need to be modified in 2027, 2028 or beyond. That is not a failure of planning; it is the realistic acknowledgment that planning in this environment is an ongoing conversation between clients, their solicitors, their accountants and their pensions and investment advisors - not a single decision taken once and left alone. Pension taxation changes regularly so any strategy may need to be revised. Changes may also need to be made to take into account the residency of the member or the beneficiaries.
How NSS Legal can help
NSS Legal advises HNW clients, business owners, professionals and internationally-mobile families on Wills, lifetime estate planning, trusts and considering their pension planning with the wider estate plan.
Both of our private client directors are full members of the Society of Trust and Estate Practitioners (STEP) and the Association of Lifetime Lawyers, and the firm's private client work is recognised by the Chambers UK guide.
If you would like to review your Will and pension arrangements ahead of April 2027, please contact Oli or Shamima directly on +44 (0)20 8209 1222 or at [email protected].
For more on our Will drafting service, our estate planning practice or probate and estate administration, please follow the relevant link.
This article is provided for general information only and does not constitute legal, tax or financial advice. The treatment of any specific pension or estate depends on the individual circumstances of the client and the rules in force at the relevant time. Clients should take advice on their own position from their solicitor, accountant and pension or financial advisor before making planning decisions. The rules summarised in this article are subject to ongoing consultation and may change before April 2027 or thereafter.