What’s changing and why does it matter?

Here’s what you need to know about the new Inheritance Tax (IHT) changes on pensions, coming into force on 6 April 2027, and what you should consider doing before these are implemented.

So what’s changed?

From 6 April 2027, most unused pension funds and pension death benefits will be included in a person’s estate for IHT calculation purposes. This applies regardless of whether the pension scheme is discretionary or non‑discretionary.

The executor (personal representative) will now be responsible for reporting and paying any IHT due on these pension assets with pension providers supporting this process. They must provide values within four weeks and offer a Pension Inheritance Tax Payment Scheme. However, death‑in‑service benefits payable from registered pension schemes will remain exempt from IHT.

Why it matters

Previously, pensions were largely excluded from estate valuations, making them a popular way to pass wealth tax efficiently. Now, pensions included in the estate for inheritance tax purposes are treated like other assets.

The government estimates that, of around 213,000 estates with inheritable pension wealth in 2027 to 2028, 10,500 estates will have an Inheritance Tax liability where previously they would not. This means approximately 38,500 estates will pay more Inheritance Tax than would previously have been the case. In some cases, combined with income tax on pension withdrawals (for deaths after age 75), beneficiaries could face an effective tax rate as high as 67%. 

Alongside this, declaring any IHT includes a administrative task, which could attract penalties of between £100 and £3,200, if delayed or incomplete.

What should we do in response?

Review your estate and pension plans as soon as possible. A financial adviser will help by reviewing pension holdings alongside other assets, especially if you expect to pass your wealth on to your children or grandchildren.

Reduce your pension pot before death, by partial withdrawal or drawdown. This could reduce future IHT liability but reducing funds by withdrawals is only effective if removed from the estate. You also need to take care as large withdrawals may push you into a higher income tax bracket and reduce funds available later.

Consider converting part of your pension into an annuity to give you an income during your lifetime and leave less unspent pension to be taxed on your death.

As annuity rates can change substantially and rapidly, there is no guarantee that when you do purchase an annuity, the rates will be favourable. Please bear in mind that this could mean that your pension thereafter may be less than you hoped for.

Giving lifetime gifts outside of the seven year rule, which applies to any significant lifetime gifts of property, money, investments, personal possessions, land, or business interests. Exemptions from this rule that could remove assets from your estate and reduce any IHT, are the annual allowance, small gifts, wedding gifts, gifts out of income, and gifts to spouse/charities.

Setting up a power of attorney and gathering your pension and other documentation together; this ensures your executor will know how to access this information.

Please note that advice relating to a power of attorney, would necessitate a referral to a service that is separate and distinct to those offered by St. James’s Place.

Keeping your will up to date to ensure your estate and tax planning goals are understood on your death.

Summary table

Topic	Details
Effective Date	6 April 2027
Assets Included	Unused pension pots plus most death benefits.
Assets Exempted	Death-in-service lump sums; dependants’ scheme pensions; survivor joint annuities.
Reporting and Payment Liability	Falls on personal representatives (PRs).
Payment Options	Pay from estate assets or via pension scheme in some cases.
IHT Thresholds	Standard nil-rate thresholds apply, plus spouse exemption.
Expected Effects	More estates taxed, higher revenue, changes in planning behaviour.

If you have substantial assets, or are concerned about inheritance for those you leave behind, the change in pension IHT applies to deaths on or after 6 April 2027, so planning now gives you the best opportunity to act.

Would you like some sound, sensitive advice on estate planning? Do get in touch with us today for a no obligation informal chat.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Powers of attorney are not regulated by the Financial Conduct Authority.

Sources

Policy paper: Inheritance Tax on unused pension funds and death benefits Published 21 July 2025

Consultation outcome: Inheritance Tax on pensions: liability, reporting and payment – Summary of responses Updated 21 July 2025

SJP Approved 28/08/2025