Inheritance tax and pensions: what the 2027 changes mean for estate planning

From 6 April 2027, the UK’s inheritance tax treatment of pensions will undergo a fundamental change, bringing certain pension benefits within the scope of an individual’s taxable estate.

For many people, this could significantly increase the inheritance tax payable on death and may require a rethink of existing estate planning arrangements.

How are inheritance tax and pensions changing – and what’s staying the same?

Historically, most unused pension funds fell outside of a deceased person’s estate for inheritance tax purposes, allowing them to pass to beneficiaries free of inheritance tax. This favourable treatment made pensions a key estate planning tool, with many individuals choosing to draw on other assets during their lifetime to preserve pension funds for the ultimate beneficiaries of their estates.

Following the Autumn Budget 2024, from 06 April 2027 most unused pension funds and pension death benefits will be included within the value of a person’s estate for inheritance tax purposes. As a result, where the total value of the estate exceeds the available nil-rate bands and applicable reliefs, pension assets may now be subject to inheritance tax at rates of up to 40%.

Importantly, the changes do not affect the way in which pension benefits are distributed on death, and the beneficiaries of a pension scheme may differ from those entitled under the deceased’s estate. Rather, the change is one of taxation: pension funds will now be taken into account when calculating an individual’s exposure to inheritance tax, notwithstanding that they continue to be administered and distributed separately from the estate.

The role of personal representatives

Practically, the burden of reporting and accounting for inheritance tax on pension assets will fall on personal representatives, who are likely to need to liaise closely with pension scheme administrators.

Mechanisms are expected to allow administrators either to withhold the necessary funds or to pay inheritance tax directly to HMRC, ensuring that any liability can be satisfied without disrupting the overall administration of the estate.

What will personal representatives need to do?

Following the changes to inheritance tax and pensions, personal representatives will be required to take a more active role in relation to pension assets, including:

• Identifying all of the deceased’s pension entitlements (including defined contribution arrangements, defined benefit schemes, SIPPs and any other relevant arrangements).
• Obtaining accurate valuations as at the date of death (and, where necessary, at any subsequent relevant dates for tax purposes).
• Determining the extent to which pension benefits fall within the scope of the taxable estate, including any lump sums or death benefits payable.
• Reporting the relevant values to HMRC as part of the inheritance tax account (for example, via form IHT400).
• Ensuring that the inheritance tax attributable to those assets is appropriately accounted for and settled before the estate is distributed.

In practice, this will require close engagement with pension scheme administrators to ensure that reporting obligations are met and that sufficient funds are available to discharge any associated inheritance tax liabilities.

Practical challenges for estate administration

In light of the above, this introduces an additional layer of complexity in the administration of a deceased’s estate, as personal representatives do not have direct control over pension funds in the same way as traditional estate assets. This creates practical and procedural challenges, particularly where personal representatives remain responsible for accurately reporting and accounting for inheritance tax on assets which fall outside their immediate control. They may be reliant on timely and accurate information from pension scheme administrators regarding fund values, nominated beneficiaries and the timing of any distributions.

This lack of control can give rise to difficulties in coordinating the settlement of inheritance tax liabilities, especially where liquidity is an issue within the estate or where there is a mismatch between those bearing the tax burden and those ultimately receiving the pension benefits.

It also increases the risk of delay in the administration process, as personal representatives must engage with multiple parties to ensure compliance. As such, careful coordination and clear communication between personal representatives, beneficiaries and pension scheme administrators will be essential to ensure the efficient administration of the estate and the proper discharge of inheritance tax liabilities.

Estate planning considerations

The inclusion of pension assets within the inheritance tax net represents a major shift in UK estate planning. It reflects the government’s intention to curb the use of pensions as a tax‑efficient wealth transfer vehicle and will require individuals and advisers to reconsider longstanding strategies, particularly where significant pension wealth forms part of an estate.

What should I do now?

Although the changes will not take effect until April 2027, individuals with significant pension wealth should consider reviewing their estate planning arrangements sooner rather than later.

Given the potential interaction between pension assets, wills, trust structures and inheritance tax liabilities, it is important to take a holistic view of your affairs. This could include:

• Reviewing your will to ensure it continues to reflect your wishes and wider estate planning objectives.
• Checking that your pension nomination forms remain up to date and aligned with your intended beneficiaries.
• Reviewing any trust structures as part of your overall succession planning arrangements.
• Assessing the value of pension assets in the context of your wider estate and potential inheritance tax exposure.
• Considering how any future inheritance tax liabilities might be funded.

If you would like advice on how inheritance tax and pensions changes may affect your estate, or assistance in reviewing your will, pension nominations and wider succession planning arrangements, please get in touch with our team of experts.

Our Legal 500-rated wills, trusts & probate team offer friendly but practical advice on estate planning and inheritance tax in light of these potential changes. Please do get in touch.