The biggest change to pension taxation in a generation
For decades, pensions have sat outside a person's estate for inheritance tax purposes. That made them one of the most powerful estate planning tools an adviser had, especially for clients keen to pass on wealth efficiently. From 6 April 2027, that advantage disappears. Unused pension funds and pension death benefits will count towards the deceased's estate for IHT, unless they pass to a surviving spouse, civil partner, or registered charity.
HMRC's impact assessment sets out the scale of the shift. Around 10,500 estates will face inheritance tax for the first time because of the change. A further 38,500 estates that would have paid IHT under the old rules will pay more. The average increase sits at roughly £34,000 per affected estate, though bills will be considerably higher for clients with larger pension funds layered on top of property and investments.
The bigger risk, which many clients will not have considered, is double taxation on inherited pension funds. Beneficiaries may face IHT at 40% on the estate, plus income tax when they draw from the inherited pension. For higher-rate beneficiaries, that can produce a combined effective rate above 60%. The long-standing strategy of leaving a pension undrawn specifically to pass on wealth tax-free is about to stop working.
Advisers have less than a year to prepare their clients. That sounds like plenty of time, but restructuring estates, arranging whole-of-life policies in trust, or shifting drawdown strategies all take months of planning, client conversations, and in some cases medical underwriting. The firms that act now, rather than waiting for the rules to land, will deliver the best outcomes and protect the most client wealth.
Key takeaways
- 10,500 estates will face IHT for the first time from April 2027 because of the pension change (HMRC).
- 38,500 estates will pay more IHT than they would have under the current rules.
- The average increase is around £34,000 per affected estate, with higher-value estates facing much bigger bills.
- Inherited pension funds could face a combined effective tax rate above 60% once IHT and beneficiary income tax are combined.
- Advisers have less than a year to identify affected clients, model the impact, and restructure plans.
Start the conversations now
Most clients will not read HMRC impact assessments. They rely on you to flag changes that affect their family's outcomes. Reach out proactively to any client whose estate plus pension fund exceeds the nil-rate bands, model the impact, and walk them through the options.
Read the full breakdown in the companion blog post on the 2027 pension IHT change. And if you want your website to answer prospect questions about pension IHT changes outside office hours, try the demo at chatifa.co.uk.