What happens to unspent pension savings under the 2027 inheritance tax rules?

From 6 April 2027, unspent pension funds are set to become part of a deceased person's estate for inheritance tax (IHT) purposes. IHT is currently charged at 40% on estates above the nil-rate band threshold (the amount you can leave free of tax, currently £325,000 for individuals, with additional allowances in some circumstances).

Before this change, most unused pension savings sat outside the estate and could be passed to beneficiaries free of IHT, making pensions a widely used estate planning tool. Under the new rules, that advantage is removed: unspent pension funds will be added to the rest of the estate and taxed alongside other assets such as property and savings.

This makes the order in which you draw on your assets in retirement more significant. Some people who previously planned to leave their pension untouched and spend other savings first may need to reconsider that approach. The change also affects how pension drawdown — where you take income flexibly from your pot rather than buying a guaranteed annuity — fits into broader estate planning.

It is worth noting that the rules around how IHT is collected on pensions, and how any double taxation with income tax is handled, are still being consulted on, so the detail may evolve before the April 2027 start date.

Because the interaction between pension withdrawals, IHT, and income tax is complex and depends on individual circumstances, a regulated financial adviser or estate planning specialist can help you understand what the change means for your own position.