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, outside inheritance tax. Millions of 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 be brought within the scope of inheritance tax. If your pension is unspent when you die, it will count as part of your estate — and the nil-rate band that protects the first £325,000 of your estate will have to stretch across everything: house, savings, investments, and now your pension too.

What exactly is changing

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

From that date:

• Unused defined contribution pension pots (the kind most people have through workplace or personal pensions) will be included in your taxable estate.
• Your pension provider will be required to report the value of your pot to HMRC when you die — so there is no question of the pot slipping through unnoticed.
• The standard nil-rate band remains frozen at £325,000 until at least 2031. It does not increase to accommodate the new rules. The same allowance that used to cover your house and savings now has to cover your pension too.
• The residence nil-rate band (worth up to £175,000 where the family home passes to direct descendants) is unaffected by these changes — but it cannot shelter pension funds.

The overall effect is that the IHT-free buffer has become thinner at exactly the moment pension wealth has become taxable.

Why this matters more than you might think

The average defined contribution pension pot for someone in their 60s is now substantial. Many people who would have sat comfortably under the IHT threshold find themselves above it once the pension is added to the calculation.

Suppose someone has a house worth £450,000, savings of £60,000, and a pension pot of £180,000. Under the old rules, the pension would be ignored for IHT — the estate is £510,000, and with the nil-rate band and residence nil-rate band combined (up to £500,000 for someone passing the family home to a child), the IHT exposure is modest.

Under the new rules, the same estate becomes £690,000. The excess over the combined threshold is now £190,000 — and at 40%, that is £76,000 of tax that was not anticipated. This is not a rare or extreme scenario. The Office for Budget Responsibility projects IHT receipts rising year after year through the 2020s, and this change is part of the reason why.

What families are doing now to prepare

Solicitors across the country are seeing a sharp increase in enquiries about estate planning since the announcement. A few approaches come up consistently.

Reviewing nominations on pension pots. You can still nominate who receives your unused pension, and the identity of the beneficiary matters for planning purposes. Speak to your pension provider and review any nomination of beneficiaries forms — many people have not touched these since they first joined the scheme.

Looking at spend-down strategies. Some financial advisers are now recommending that clients draw on pension savings more actively during retirement, particularly where other assets — like ISAs — can be left to grow instead. This is a decision with significant personal financial implications and needs specialist advice.

Discretionary trusts. There is real demand here among families who want to retain flexibility over how and when assets are distributed after death. A well-drafted discretionary trust can sit alongside a will to help manage the combined impact of these changes. If a trust has been on your radar, the 2027 deadline has made that conversation more pressing.

Updating wills. Wills drafted when pensions sat outside the estate may now be out of step with your actual wishes and 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 sounds far enough away that it is easy to put off. It is not. Pension reviews, trust drafting, and will updates all take time — and the solicitors and financial advisers who specialise in this area are busier than they have ever been.

There is no urgency in the sense that nothing catastrophic happens if you wait a little longer. But there is a window here, and it is closing.

If you are not sure where your pension sits in your overall estate picture, a short conversation with a solicitor is a sensible first step. We are happy to talk it through — no commitment required.