Pensions and Inheritance Tax: What Advice Firms Need to Know Ahead of April 2027
For as long as most of us have worked in this industry, pensions have sat outside the estate for Inheritance Tax purposes. It's shaped how we've built retirement and legacy strategies for clients for years: spend other assets first, preserve the pension, pass it on largely tax-free.
From 6 April 2027, that assumption no longer holds.
This isn't a proposal under consultation. The Finance Act 2026 received Royal Assent on 18 March 2026, and it puts the reform into law for deaths on or after 6 April 2027. For any firm with clients holding meaningful pension wealth, this is one of the most significant shifts in estate planning in a generation, and the firms having these conversations early are going to be the ones clients remember.
What's actually changing
From 6 April 2027, most unused pension funds and pension death benefits will be brought into the value of a person's estate for Inheritance Tax purposes. That includes funds paid out as a lump sum, beneficiary's drawdown, or an annuity. Lump sums paid into a bypass trust are also in scope.
Where the estate exceeds the available nil-rate band(s), IHT is charged at 40% on the excess. It's also worth flagging to clients with offshore arrangements: qualifying non-UK pension schemes, including QROPS, will also come within the charge to IHT where the individual is a long-term UK resident.
There's a practical sting for anyone holding commercial property inside a SIPP, too. Neither business nor agricultural property relief will apply to qualifying assets held within a pension, meaning full IHT exposure, where the same asset held personally or through a company could attract 50–100% relief. For clients using pensions as a vehicle for commercial property, this is worth reviewing well before 2027.
What's still protected
Some of the existing IHT architecture survives the reform:
Spousal and civil partner exemption: benefits passing to a surviving spouse or civil partner (as a long-term UK resident) remain exempt.
Registered charities: gifts to charity remain outside the charge.
Death-in-service benefits: lump sums paid from a registered pension scheme are excluded, including for non-active members.
The double taxation problem
The detail that tends to land hardest with clients isn't the headline 40%. It's the interaction with income tax. Where a beneficiary draws on an inherited pension that has already been subject to IHT, income tax can also apply on the withdrawal. In some circumstances, particularly deaths after age 75, the combined effective rate can exceed 64%.
This changes the maths on a strategy many clients have followed for years: preserve the pension, spend everything else first. For some clients, the opposite may now make more sense: drawing on pension funds during their own lifetime and preserving other assets for beneficiaries instead. There's no universal answer here; it depends heavily on individual circumstances, health, and the beneficiaries' own tax position.
A new administrative burden
One change that's had less airtime: personal representatives (executors) will be responsible for reporting and paying any IHT due on unused pension funds and death benefits. HMRC has published regulations on information-sharing between personal representatives and pension scheme administrators, alongside a technical note on how the process is expected to work, with further guidance, calculators and process maps due ahead of implementation.
For clients acting as executors, often with no financial background, this is a meaningfully more complex process than before. It's worth having this conversation now, not in the weeks after a death, when PRs will already be under pressure and working to the same six-month payment deadline.
Who's actually affected
It's worth keeping this in perspective for clients who don't need to worry unduly. The government's own estimate is that, of around 213,000 estates with inheritable pension wealth in 2027/28, roughly 10,500 (about 1.5% of UK deaths) will become newly liable for IHT as a result of this change. Most estates still won't pay IHT at all.
That said, "most estates" isn't the relevant benchmark for many of our clients. If a client has built meaningful pension wealth with the specific intention of passing it on, this is a conversation worth having individually, not a box-ticking exercise.
What this means for the advice process
A few practical steps we've found useful in preparing client conversations ahead of April 2027:
Review expression of wishes and nomination forms. These haven't historically needed frequent revisiting; that's changing.
Revisit drawdown and spending order strategy. The "spend everything else first" default deserves a fresh look on a client-by-client basis.
Flag QNUPS/QROPS and pension-held commercial property early. These clients face specific additional complexity.
Build in time for full estate plan reviews. This sits at the intersection of p
ensions, IHT and probate, and often benefits from coordination with a client's solicitor.
Where this leaves paraplanning
Changes of this scale generate a lot of technical research and report-writing pressure across a practice all at once, since every client with material pension wealth potentially needs a revisited recommendation before April 2027, on top of business as usual. That's exactly the kind of capacity crunch outsourced paraplanning support exists for, and it's a conversation we're already having with firms thinking ahead of the deadline rather than reacting to it.
If your practice is starting to think through how to resource this over the next 18 months, we'd be glad to talk it through.
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