The biggest change to pension taxation in a generation is less than a year away
In the 2024 Autumn Budget, the Chancellor announced that from April 6, 2027, unused pension funds will be included in a person's estate for inheritance tax purposes. This is a fundamental shift. For decades, pensions have sat outside the IHT net, making them one of the most powerful estate planning tools available. That advantage is about to disappear.
The government estimates that around 10,500 estates will face an IHT liability where previously they would not, and approximately 38,500 estates will pay more IHT than before. The average increase in IHT liability is expected to be around £34,000.
£34,000
average increase in IHT liability per affected estate
Source: HMRC Impact Assessment
For financial advisers, this is not a future problem. It is a current one. Clients need to understand the change, review their estate plans, and potentially restructure how they hold and use their pension wealth. That work needs to happen now, not in March 2027.
What exactly is changing?
Currently, when someone dies, their unused pension funds are typically paid to nominated beneficiaries outside the estate. They are not subject to IHT. If the member dies before 75, the funds are paid tax-free. After 75, beneficiaries pay income tax at their marginal rate on withdrawals, but still no IHT.
From April 2027, the picture changes significantly.
| Feature | Current rules | From April 2027 |
|---|---|---|
| Pension in IHT estate? | ✘ | ✔ |
| Tax-free to beneficiaries (death before 75) | ✔ | Minus IHT, then tax-free |
| Income tax on drawdown (death after 75) | Yes, at beneficiary marginal rate | Yes, plus IHT on estate |
| Double taxation possible? | ✘ | ✔ |
| Estate planning benefit of leaving pension undrawn | Significant | Reduced or eliminated |
Who is affected?
Not every client will be impacted. The clients who need urgent attention are those whose estates, including pension funds, exceed the nil-rate band (currently £325,000, plus £175,000 residence nil-rate band where applicable).
Likelihood of increased IHT %
The clients most affected are those who have been deliberately leaving their pension undrawn as an estate planning strategy. That strategy, which has been sound advice for years, needs to be revisited in light of these changes.
High-risk client profiles:
- Clients with large defined contribution pensions they intended to pass on
- Clients who have been using pension carry-forward aggressively as an IHT tool
- Clients whose estates are just below the IHT threshold, where adding pension value pushes them over
- Business owners with both business assets (now subject to the new BPR cap) and significant pension funds
What should advisers be doing right now?
You have eleven months. That sounds like plenty, but complex estate restructuring takes time, and clients need multiple conversations to understand and act on changes of this magnitude.
Step 1
Identify affected clients immediately
Run a report on your client bank. Any client whose estate plus pension fund exceeds the nil-rate bands needs a review. Prioritise those with the largest pension funds relative to their estate.
Step 2
Model the impact for each client
Show each affected client the IHT difference under current rules vs April 2027 rules. Concrete numbers drive action far more effectively than abstract explanations.
Step 3
Review drawdown strategies
For some clients, drawing more from their pension now and gifting, spending, or investing in IHT-exempt assets may be more tax-efficient than leaving the pension to grow. The maths depends on the individual situation.
Step 4
Consider life insurance solutions
Whole-of-life policies written in trust can provide a fund to cover the expected IHT liability without the cost falling on the estate. These take time to set up and medical underwriting can be slow for older clients.
Step 5
Document everything
Consumer Duty requires you to demonstrate that clients understand the changes and the options available to them. Record your advice, the client's decision, and the reasoning behind it.
This is a proactive advice opportunity
Most clients will not come to you with this. They do not read HMRC impact assessments or follow Budget announcements in detail. They rely on you to tell them when something important changes.
10,500
estates will face IHT for the first time due to this change
Source: HMRC estimates
The advisers who reach out to affected clients now, rather than waiting for clients to ask, will deliver better outcomes and strengthen their relationships. This is exactly the kind of proactive, personalised advice that justifies your fees and differentiates you from a robo-adviser or a DIY approach.
It is also a new business opportunity. Prospects who are aware of the change and worried about its impact will be searching for advice. "Pension inheritance tax 2027" is going to be a heavily searched term over the coming months. If your website has content that addresses this topic clearly, you will attract prospects who are actively looking for help.
As we explored in Consumer Duty and Your IFA Website, the FCA expects firms to communicate clearly about changes that affect client outcomes. Having content on your website that explains the 2027 pension IHT change in plain English is not just good marketing. It is good compliance.
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