For years, UK pensions had a quiet advantage in estate planning. If you did not need the money, you could leave your pension untouched and pass it on. Because the pot sat outside your estate, it was not counted for inheritance tax. That is now ending.
From 6 April 2027, most unused pension savings will be brought into the estate for inheritance tax purposes. This is the biggest single change to pension planning in a decade, and it deserves a calm, practical read rather than panic.
Who is affected
The change affects anyone who holds a defined contribution pension — the kind where you can see a pot of money, such as a SIPP, a personal pension, or most modern workplace pensions. It does not change the tax rules for drawdown or annuity income that you actually take in retirement.
Defined benefit pensions (the older "final salary" style) are treated differently because there is no pot of money to leave behind in the same sense. The new rules focus on the unused balance at death.
What will happen from April 2027
When you die, pension administrators will work with HMRC to calculate how much of the unused pension should be added to your estate. Any inheritance tax due will be paid from the pension before the balance is passed on.
If you die before age 75, beneficiaries will still usually receive pension income tax free. If you die at 75 or later, the beneficiary pays income tax at their marginal rate when they draw the money. The new inheritance tax rules sit on top of that, so a large pension pot left to an adult child can face both.
What it does not change
Tax relief on contributions is unchanged. The annual allowance is unchanged. Your ability to take 25 per cent tax-free cash at age 55 (rising to 57 from 2028) is unchanged. The day-to-day job of saving into a pension is still one of the most tax-efficient things you can do.
How to plan for it
The first step is simply to check what you have. Log in to your pension provider or use the GOV.UK pension tracing service if you are not sure which pots are still active.
Then look at the three levers that usually matter most:
- Drawdown pace: a slightly faster drawdown can reduce the balance that is eventually in the estate.
- Gifting: once you take pension money out, you can use gift allowances to pass it on during your lifetime.
- ISAs and other wrappers: money spent from a pension can still be reinvested in a spouse's ISA or in investments held jointly.
None of these are one-click decisions. They need to be modelled against the rest of your retirement plan and against your own life expectancy, not last week's newspaper headline.
Run the numbers on your own position
Use our pension calculator and our inheritance tax calculator together. The combined view usually produces calmer decisions than either on its own. Where the numbers are large, a one-off session with a financial adviser is likely to pay for itself many times over.