What April 2027 Means For The Pension You Were Going To Pass On

For more than a decade one of the most efficient inheritance most higher earners could leave was their pension. From April 2027 that stops being true. Unused pension funds and most death benefits will be included in the value of an estate for inheritance tax, ending the treatment introduced in 2015 that placed defined contribution pensions outside the estate. It is the largest structural shift to UK personal wealth taxation since the residence nil-rate band was introduced in 2017.

The change has attracted less attention than its significance warrants. There is no headline rate rise, no dramatic announcement, no campaign to defend the relief that is disappearing. The legislation moves quietly through Finance Act technicality. What it changes is the logic that has underpinned the retirement and estate planning of countless families across Hertfordshire, London and beyond. The eleven months between now and April 2027 are the window in which that planning can be reviewed.

What changes in April 2027

From 6 April 2027, unused pension funds and most death benefits will be included in the value of an estate for inheritance tax. The change does not narrow the relief. It removes it.

The arithmetic can be seen most clearly through a hypothetical couple in their early 60s. Two pensions worth £500,000 each, a home worth £1.5 million and other assets sufficient to use the available nil-rate bands. Under the rules that applied from 2015 to April 2027, the £1 million of combined pension wealth sat outside the estate, with beneficiaries able to draw it across their own lifetime at modest income tax rates. Under the rules from April 2027, the same pension wealth enters the estate and would attract roughly £400,000 of inheritance tax on second death where the nil-rate bands have been used elsewhere. The number changes with the size of the pots and the composition of the rest of the estate, but the structural point is the same. What was the most efficient legacy asset in the personal tax code becomes an ordinary asset taxed in the ordinary way.

The change also inverts the drawdown logic that the previous treatment encouraged. Standard guidance for higher earners has been to draw income from ISAs and general investment accounts first in retirement, preserving the pension to pass on. From April 2027 that logic weakens. The pension may have a different role in retirement, with income drawn earlier rather than later. The order in which different pots are tapped becomes a question worth revisiting.

The age 75 line that catches families out

The April 2027 change is not the only tax that bears on inherited pensions. A separate set of rules, unchanged since 2015, treats inherited pensions very differently depending on whether the pension holder dies before or after age 75. Most financial adviser communication on the April 2027 change overlooks this. Most family conversations do not get to it.

Before age 75, beneficiaries can usually take income or lump sums from an inherited pension free of income tax, regardless of their own tax band. From age 75 onwards, every withdrawal from the inherited pension is taxed as the beneficiary's marginal-rate income. A higher rate taxpayer drawing from an inherited pension pays 40 percent on every pound withdrawn. An additional rate taxpayer pays 45 percent.

From April 2027 the two systems apply together rather than as alternatives. A pension passed at death is first reduced by inheritance tax at the estate level. Whatever remains is then subject to the beneficiary's income tax when they draw from it, with the rate depending on whether the holder died before or after age 75. For a pension passed by someone over 75 to a higher-rate-taxpayer child, the combined effect can take a £500,000 pension down to roughly £180,000 of net inheritance after both layers. The pension wrapper still grows tax-free during life. What changes is how much survives the transfer.

Across Hertfordshire, the Chilterns and London, average property values in St Albans, Harpenden, Radlett, Mill Hill, Hampstead, Amersham and Beaconsfield regularly exceed the combined £500,000 nil-rate band thresholds available to most couples. The pension change moves households into inheritance tax territory they were not previously in. The pension wealth that families had built specifically as the inheritance asset has almost overnight become one of the assets driving the inheritance tax bill rather than avoiding it.

The questions families are starting to ask

In our conversations with clients this spring, two questions recur.

The first is whether the change is reversible. It is not. The legislation is in the Finance Act and takes effect on the date set. A future government could reverse it but no candidate currently signalling interest in leadership of either main party has proposed doing so. Planning should proceed on the basis that the change happens.

The second is whether anything done now matters. It does, more than the smaller dividend and Business Asset Disposal Relief changes that arrived this April. Pension drawdown decisions take time to structure and longer to execute. The drawdown sequence cannot be reversed once income has been taken. Gifting strategies under the seven-year rule require the full seven years to remove the gifted amount from the estate, which means the latest a gift made in May 2026 produces full inheritance tax relief is May 2033. The earlier the planning begins, the more options remain on the table.

Where the planning sits now

The questions that come into view include the drawdown sequence in retirement, whether earlier pension income could fund gifting under the seven-year rule, how the pension interacts with other assets affected by the April 2026 changes to Business Property Relief and AIM and whether wills drafted under the previous regime still reflect the intended outcome now the estate composition has fundamentally changed. Pension nominations are worth a separate review. Many families have not looked at theirs in a decade and the documentation that determines who inherits the pension is not always the documentation they assume.

None of these has a single right answer. The position for a couple with significant business interests differs from the position for a couple with most of their wealth in pensions and property. The position for a family with adult children differs from the position for a family with younger dependants. What is consistent across situations is that the conversation is more useful while there is still room for staged decisions rather than rushed ones.

The pension that used to be a legacy is still an important asset. It is now a different kind of asset.

This article is for general information and does not constitute personal advice.

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on factors including the size of the fund at retirement, future interest rates and tax legislation.

The value of investments can fall as well as rise. You may not get back what you originally invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.. Estate planning, inheritance tax planning and tax planning are not regulated by the Financial Conduct Authority.

BSG Financial Solutions is an Appointed Representative of The Openwork Partnership, a trading style of Openwork Limited, which is authorised and regulated by the Financial Conduct Authority. Approved by The Openwork partnership on 01/06/2026.

BSG Financial Solutions is a chartered financial planning firm based in Radlett and London. Established 1979, BSG advises families and businesses across Hertfordshire, London and surrounding counties on financial planning, pensions and intergenerational wealth.

Sources: Finance Act 2024 (provisions on inheritance tax treatment of pension death benefits, taking effect 6 April 2027). HMRC technical note "Inheritance Tax on Pensions: Liability, Reporting and Payment", March 2025. Office for Budget Responsibility analysis of the change, October 2024 Economic and Fiscal Outlook.

FAQs

Q: What is changing for pensions and inheritance tax in April 2027?

A: From 6 April 2027, unused pension funds and most death benefits will be included in the value of an estate for inheritance tax purposes. Pensions currently sit outside the estate for IHT. The change applies to defined contribution pensions and most death benefits from defined benefit schemes.

Q: When does the pension inheritance tax change take effect?

A: 6 April 2027.

Q: How much inheritance tax will my family pay on my pension after April 2027?

A: It depends on the total value of the estate and how much of the available nil-rate bands have been used by other assets. Where the estate is above the available nil-rate bands and standard residence nil-rate band, the pension portion would attract 40 percent inheritance tax in the same way as other estate assets. Pension benefits paid before age 75 may also be subject to income tax for the beneficiary depending on the structure.

Q: Should I still contribute to my pension after April 2027?

A: Contributing to a pension remains tax-relieved on the way in and tax-free in growth and remains a tax-efficient vehicle for retirement income. The change affects what happens to unused funds at death, not the wider tax efficiency of the pension during life. The decision is individual and depends on personal circumstances. This article does not constitute personal advice.

Q: Can I still leave my pension to my spouse or civil partner?

A: Transfers between spouses and civil partners remain exempt from inheritance tax, including for pensions. The change affects what happens at the second death (when both spouses have died) and how the pension is treated as part of that combined estate.

Q: Can I leave my pension to my children after April 2027?

A: Yes. Pensions can still be passed to children and other beneficiaries from April 2027. What changes is the tax treatment, not the ability to nominate beneficiaries. From 6 April 2027, the value of unused pension funds and most death benefits is included in the estate for inheritance tax. Where the estate is above the available nil-rate bands, the pension portion attracts 40 percent inheritance tax in the same way as other estate assets. In addition, where the pension holder dies after age 75, beneficiaries pay income tax at their marginal rate on withdrawals from the inherited pension. Before age 75, withdrawals are generally income-tax-free for the beneficiary. The two layers (inheritance tax on the estate value plus income tax on withdrawals after age 75) apply together, not as alternatives.

Q: How is an inherited pension taxed after age 75?

A: From age 75 onwards, beneficiaries pay income tax at their marginal rate on withdrawals from an inherited pension. A basic rate taxpayer pays 20 percent on each withdrawal, a higher rate taxpayer pays 40 percent and an additional rate taxpayer pays 45 percent. This applies regardless of the April 2027 changes and has been the rule since 2015. Where the pension holder dies before age 75, beneficiaries can usually take income or lump sums free of income tax. From April 2027, the new inheritance tax treatment applies on top of these existing income tax rules, so a pension passed by someone over 75 may be subject to both inheritance tax at the estate level and income tax on the beneficiary's withdrawals.

Q: Does the change affect defined benefit pensions?

A: Most defined benefit death benefits are included in the change. There are some technical exceptions for dependant's pensions paid as ongoing income rather than lump sums. The treatment depends on scheme rules and the form in which benefits are paid.

Q: Will my pension still be outside the estate for inheritance tax in 2026?

A: For deaths occurring before 6 April 2027, the current treatment applies and pensions remain outside the estate. The change only applies to deaths on or after 6 April 2027.

Q: What is the seven-year rule for gifting and how does it interact with pension drawdown?

A: Gifts made from income or capital that are above the standard annual exempt amounts may fall outside the estate for inheritance tax if the donor survives seven years after making the gift. Where pension income is used to fund regular gifting from surplus income, there are specific HMRC rules that may exempt the gifts from inheritance tax without needing to wait seven years. The position is individual and depends on documentation and circumstances.

Q: I am local, will this affect me?

Across Hertfordshire, the Chilterns and the North London suburbs inside the M25, average property values in St Albans, Harpenden, Radlett, Mill Hill, Totteridge, Amersham and Beaconsfield regularly exceed the combined £500,000 nil-rate band thresholds available to most couples. The pension change moves households into inheritance tax territory they were not previously in. The pension wealth that families had built specifically as the inheritance asset has almost overnight become one of the assets driving the inheritance tax bill rather than avoiding it.