Pension Pots and Inheritance Tax: What Changes in April 2027

The rule everyone assumed would never change

For years, unused pension savings sat in a category of their own. When someone died before drawing their full pension, the pot passed to their family outside the estate and outside inheritance tax. Many families built retirement and estate plans around that assumption.

From April 2027, that changes.

The Government has confirmed that unused defined contribution pension pots will come within inheritance tax. If your pension is unspent when you die, it will count as part of your estate. The nil-rate band that protects the first £325,000 of your estate will then have to stretch across everything: house, savings, investments, and now your pension.

What exactly is changing

Under the current rules, most pension pots fall outside your estate. There is no inheritance tax charge, and you can nominate who receives the funds with relative freedom. That remains the position until 5 April 2027.

From 6 April 2027:

• Unused defined contribution pension pots (the kind most people have through workplace or personal pensions) will be included in your taxable estate.
• Your personal representatives will report and pay the tax. The pension scheme must give them the value of the pot, so it cannot slip through unnoticed.
• The nil-rate band remains frozen at £325,000 until at least April 2031. It does not increase to allow for the new rules. The allowance that used to cover your house and savings now has to cover your pension too.
• The residence nil-rate band (up to £175,000 where the family home passes to children or grandchildren) is unchanged, but it cannot shelter pension funds.
• The usual exemptions still apply. A pension passing to a spouse or civil partner is exempt, as other assets are. Death in service benefits from a registered pension scheme are excluded.

The effect is that the tax-free buffer is thinner at exactly the moment pension wealth becomes taxable.

Why this matters more than you might think

Many people who sit comfortably under the threshold today will be above it once the pension is added.

Suppose someone has a house worth £450,000, savings of £60,000 and a pension pot of £180,000, and leaves the home to a child. Under the old rules the pension is ignored for inheritance tax. The estate is £510,000. With the nil-rate band and residence nil-rate band combined (£500,000), the tax is £4,000.

Under the new rules the same estate is £690,000. The excess over the combined £500,000 is £190,000, and at 40% the tax is £76,000, against £4,000 before. This is not a rare or extreme example.

What families are doing to prepare

A few approaches come up consistently.

Reviewing nominations on pension pots. You can still nominate who receives your unused pension, and who that is matters for planning. Ask your pension provider for your nomination form and check it. Many people have not touched it since they joined the scheme.

Looking at spend-down strategies. Some financial advisers now recommend drawing on pension savings more actively in retirement, and leaving other assets, such as ISAs, to grow instead. Money drawn from a pension and kept as savings still counts in your estate. This affects your income for life and needs regulated financial advice.

Discretionary trusts. A discretionary trust in a will gives the trustees control over who receives what, and when. It can help manage the combined effect of these changes. If a trust has been on your mind, April 2027 makes that conversation more pressing.

Updating wills. A will drafted when pensions sat outside the estate may now be out of step with your wishes and your tax position. If yours was last reviewed more than two or three years ago, it is worth another look.

A note on timing

April 2027 is close. Pension reviews, trust drafting and will updates all take time.

Waiting a little longer is not a disaster, but the time to prepare is running down.

If you are not sure where your pension sits in your overall estate, a short conversation is a sensible first step. Aaron will talk it through. The first call is free, with no obligation.