Major inheritance tax changes for pensions from April 2027

Your guide to what's changing and how to plan ahead

Legislation Day (Monday 21 July) saw the government publish the draft Finance Bill 2025-26, introducing significant reforms to the inheritance tax treatment of pensions. From 6 April 2027, most unused pension funds and death benefits will be included in a person's estate for inheritance tax purposes.

What's changing?

Currently, most UK pension schemes are discretionary, meaning unused pension funds typically fall outside the estate for inheritance tax. This has made pensions a valuable tool not only for retirement savings but also for estate planning.

From April 2027, this will change. Unused pension pots and death benefits will be treated as part of the deceased's estate and potentially subject to inheritance tax at a rate of 40% above the nil rate band.

Why does this matter?

The nil rate band – the threshold below which no inheritance tax is paid – is currently £325,000. There's also the residence nil rate band of up to £175,000 for estates where a home is passed to direct descendants. However, this is tapered for estates over £2 million and lost entirely at £2.35 million.

Including pensions in the estate will push more estates over these thresholds, resulting in:

• Higher tax bills
• Reduced inheritance for beneficiaries
• Loss of residence nil rate band relief.

Unintended consequences to watch for

1. How will the nil rate band be applied?

The draft legislation doesn't clarify how the nil rate band will be allocated when pensions are included. Will it be split proportionately across the estate? Or applied differently?

This raises practical and legal challenges:

• Disputes may arise if the pension beneficiaries are different from the beneficiaries of the rest of the estate.
• Complex calculations will fall to the personal representatives, especially where multiple pension pots exist. This could lead to the administration of estates taking longer, especially as the changes bed in, and frustration from beneficiaries at delays.
• HMRC can apply penalties and interest if reporting of an estate is inaccurate or incomplete, so the changes really will make the role of personal representative more onerous.

2. What if you need to change your beneficiaries, but can't?

Many people nominate pension beneficiaries via an expression of wishes form. This tells the pension provider who you'd like your pension pot to go to when you die, and – although the ultimate decision remains at the discretion of the pension scheme trustees – expression of wishes forms are often followed. With the new inheritance tax rules, it is vital to review these nominations, so that your overall estate plan fits together and you don't accidentally create a bigger tax bill than necessary. For example, with the new rules, it may be more tax-efficient to nominate a spouse, who benefits from the spousal inheritance tax exemption, where perhaps you had nominated your children before.

But what if someone has lost mental capacity and can't update their nominations?

• Outdated choices may lead to unintended beneficiaries inheriting the pension. Circumstances alter over the years, and it's important to ensure nominations reflect those changes.
• Higher tax bills could result from inefficient planning. If someone expected a beneficiary to receive their pension pot free of inheritance tax, a reduced inheritance could lead to claims against the estate for inadequate financial provision. Similarly, if the inclusion of the pension significantly increases the overall inheritance tax liability, other beneficiaries – who may receive less from the rest of the estate – could also bring claims. These disputes could complicate estate administration and lead to costly litigation.
• It might be possible for an attorney under a Lasting Power of Attorney to make a change to a nomination, but only if they have the express power to do so. Otherwise, an application could be made to the Court of Protection, but this is slow, costly, and uncertain.

What you should do now

To prepare for the April 2027 changes:

• Review you pension nominations: Do they still make sense in light of the changes?
• Update your Will: Ensure it aligns with your pension plans. If you need to change who your pension is nominated to, you may also need to make changes to your Will to ensure you have provided for all your intended beneficiaries.
• Seek professional advice: a financial advisor and a solicitor specialising in estate planning can help you navigate changes.
• Put Lasting Powers of Attorney in place.

In summary

The inclusion of pensions in estates for inheritance tax from April 2027 is a major shift. While the finer details are still being finalised, early planning is essential. By reviewing your estate and pension arrangements now, you can help protect your loved ones from unexpected tax burdens and legal complications.

References: Inheritance Tax on unused pension funds and death benefits - GOV.UK