From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a person’s estate for Inheritance Tax purposes. This is a major change for families who have previously viewed pensions as a tax-efficient way to pass wealth on to the next generation.

At present, many defined contribution pensions usually sit outside the estate for Inheritance Tax. This has meant some people have chosen to draw on other savings first, while leaving pension wealth untouched for beneficiaries. However, the new rules may change how retirement income, estate planning and pension withdrawals are approached.

The change does not mean every pension will create an Inheritance Tax bill. Most estates are still expected to remain outside the scope of IHT. However, the government estimates that around 10,500 estates with inheritable pension wealth in 2027 to 2028 will become liable for IHT where they would not have been before, while around 38,500 estates may pay more tax than under the current rules.

Why this matters for pension and estate planning

For many families, pension planning and inheritance planning have been treated separately. That may no longer be suitable.

From April 2027, unused pension wealth may need to be considered alongside property, savings, investments and other assets when calculating the value of an estate. If the total estate exceeds the available Inheritance Tax allowances, the excess is usually taxed at 40%.

This could particularly affect people who have built up sizeable pension pots, own a valuable home, or have deliberately preserved their pension while using ISAs, savings or other investments to fund retirement.

It may also affect beneficiaries. Personal representatives will be responsible for reporting and paying any Inheritance Tax due on unused pension funds and pension death benefits. The rules will include mechanisms that allow pension scheme administrators to withhold funds in certain circumstances to help meet any tax due.

Why old retirement strategies may need reviewing

A common retirement planning approach has been to spend taxable assets first and leave pension funds untouched for as long as possible. This made sense for some people because pensions often sat outside the estate for Inheritance Tax.

However, once unused pension funds are included in the estate, that approach may no longer be the most suitable option.

Some people may need to reconsider:

• whether to draw more income from their pension during retirement
• whether to use other savings first or preserve them
• whether gifting during lifetime could be appropriate
• whether life insurance written in trust could help cover a future IHT liability
• whether existing wills, trusts and pension nominations still reflect their wishes

These decisions should not be rushed. Drawing pension income earlier may reduce a future estate, but it could also affect income tax, investment growth, long-term care planning and retirement security. Therefore, the right approach depends on the full financial picture.

What should you review before 2027?

Although the rules do not take effect until 6 April 2027, it is sensible to begin reviewing your position now.

A good starting point is to estimate the total value of your estate. This should include your home, savings, investments, pensions, business interests, life policies and any other assets. You should then check whether your current plans still work under the incoming rules.

It is also important to review pension death benefit nominations. These forms tell pension providers who you would like to receive your pension benefits after death. While nominations may not remove the pension from the IHT calculation after 2027, they remain important for making sure benefits are directed in line with your wishes.

You may also need to review your will, lasting powers of attorney and any trust arrangements. Estate planning works best when legal, tax, pension and investment decisions are aligned.

Why advice matters now

The pension IHT change is not just a technical tax update. It may alter how people fund retirement, pass on wealth and structure their wider estate.

At DG Financial Services, we can help you review how the April 2027 changes may affect your retirement and inheritance planning. This could include looking at your pension arrangements, beneficiary nominations, estate value, income strategy and the wider options available to you.

The aim is not to make rushed decisions. It is important to understand the possible impact early, so you have time to plan carefully and avoid leaving your family with unexpected complexity later.

Could the pension IHT changes affect your estate?

If you have built up pension wealth and want to understand how the 2027 rules may affect your family, now is a sensible time to review your plans. Please speak with DG Financial Services for guidance based on your circumstances.

CAVEAT: THIS DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

SOURCE DATA
[1] GOV.UK, Inheritance Tax on pensions: technical note, published 11 May 2026
[2] GOV.UK, Inheritance Tax: unused pension funds and death benefits, published 26 November 2025
[3] GOV.UK, Inheritance Tax, unused pension funds and death benefits policy paper, published 26 November 2025