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Pensions lose the inheritance tax shelter they have enjoyed for decades. Six structural decisions made before 5 April 2027 will largely determine how much of your pension your family eventually keeps. Rushing the wrong one can cost more than doing nothing.
Key Takeaways
- From 6 April 2027, unused pension funds count toward your estate and may attract inheritance tax at 40%.
- Pensions left to a spouse or civil partner remain exempt from inheritance tax under the spousal exemption.
- For deaths after age 75, beneficiaries can face inheritance tax on the pot plus income tax on withdrawals, a combined effective rate of up to 67%.
- Death-in-service benefits paid by registered pension schemes will remain outside the inheritance tax estate after April 2027.
How does the April 2027 pension inheritance tax change actually work?
From 6 April 2027, most unused pension funds and lump sum death benefits sit inside your estate for inheritance tax. Tax applies at 40% on the part of your combined estate above the available nil-rate bands. Death-in-service benefits and assets passing to a spouse remain outside the charge.
The Inheritance Tax Act 1984 will be amended through Finance Bill 2025-26 to bring unused pension funds and most death benefits into the estate. Under HMRC’s confirmed policy, your personal representatives report and pay the tax. They can direct your pension provider to withhold up to 50% of taxable benefits for up to 15 months to settle the bill.
Decision 1: Should you draw down your pension earlier than originally planned?
Drawing down earlier reduces the pension pot exposed to inheritance tax in 2027 but creates an income tax cost now. The right answer depends on your current marginal rate, the size of your estate, your beneficiaries’ tax positions and how much income you need to live on.
The previous default, spend other assets first and leave the pension untouched, assumed pensions sat outside the estate. From April 2027 that logic loses force for estates above the nil-rate band of £325,000 per individual (frozen until April 2031). One planning option is structured drawdown coupled with trust planning — spending the withdrawn funds during your lifetime or gifting into trust can help remove that capital from the IHT estate. Any specific pension drawdown decision is FCA-regulated advice and should be taken with an FCA-authorised financial adviser. An alternative is to pay into your children’s pensions via gifts of surplus income and they will receive a tax rebate. Paying the income tax but getting the tax rebate after will bring the family to a tax neutral position.
Decision 2: Should you take your 25% tax-free lump sum before April 2027?
Taking the tax-free lump sum (officially the Pension Commencement Lump Sum) does not, on its own, reduce inheritance tax exposure. The cash simply moves from the pension into your taxable estate. The question is what you do with the money, not whether you take it.
Once the lump sum sits in a current account it is fully exposed to inheritance tax. Taking it can reduce exposure if the cash is then spent or gifted into trust. For wealthier families, one option to consider with your tax and legal advisers is placing withdrawn funds into a Family Investment Company as a director’s loan, then gifting the loan balance to beneficiaries. Gifted loans can qualify as potentially exempt transfers, subject to the individual facts. Meaning it will be outside of the estate after 7 years.
Decision 3: Who should you nominate on your expression of wishes form?
Pensions left to a surviving spouse or civil partner pass free of inheritance tax under the spousal exemption (Section 18, Inheritance Tax Act 1984). Naming children or grandchildren directly may trigger inheritance tax sooner. Nominating grandchildren can spread tax across generations. Update your expression of wishes for every pension whenever your circumstances change.
Pension scheme trustees retain discretion, but a current expression of wishes carries weight. Naming a spouse first lets the surviving partner inherit outside inheritance tax. Generation-skipping nominations to grandchildren can reduce cumulative tax across two deaths, especially where adult children already hold estates above their nil-rate bands. See Bluebond’s wills and estate planning page.
Decision 4: Should you start gifting from pension income now?
Regular gifts that form part of your normal expenditure out of income are immediately exempt from inheritance tax, with no seven-year rule and no upper limit. The exemption is set out at IHTM14231 in HMRC’s Inheritance Tax Manual. Gifts must be habitual, paid from income, and leave you with enough to maintain your usual standard of living.
This is one of the most powerful and least used reliefs in UK inheritance tax. For pension holders drawing more than they spend, redirecting the surplus to children or grandchildren as regular standing orders moves significant amounts out of the estate. HMRC will expect income and expenditure records (form IHT403) when executors claim the exemption.
Decision 5: Should you consider an annuity or whole-of-life cover to manage exposure?
An annuity converts pension capital into regular income for life and removes the residual capital from your estate after death (subject to specific terms). A whole-of-life policy written in trust pays a lump sum outside the estate to fund the eventual inheritance tax bill. Both add cost and complexity, both can have a place.
Annuities suit clients prioritising income security over legacy. Joint-life or value-protected annuities preserve some inheritance for a spouse but reduce pension flexibility. Whole-of-life cover written in trust does not pass through the estate and underwrites the inheritance tax bill without forcing asset sales. Underwriting requires good health, so leaving these decisions late closes the door.
Decision 6: How should you handle pension-held property or other illiquid assets?
Commercial property, business loans and unlisted shares inside a pension face the same April 2027 inclusion as cash and listed investments. Illiquid pension assets create a real problem for your executors, who must value them and pay any inheritance tax due within six months of death. Liquidity planning should start now.
Where a pension holds the trading premises of a family business, the property cannot easily be sold to fund inheritance tax without disrupting operations. Options include selling to the operating company at full market value, holding cash inside the pension, or arranging life cover. Conveyancing and trustee approvals take months.
Expert perspective: what most people get wrong about the 2027 pension change
The most common mistake is treating April 2027 as a single “do this now” moment. The right response is rarely a sudden withdrawal, a rushed transfer or a panic annuity purchase. Roughly 19 out of 20 Bluebond clients legitimately pay zero inheritance tax through a coordinated plan that combines tax planning, wills and trusts (drafted by our employed solicitors), and — where regulated pension or insurance products are involved — regulated advice from our independent FCA-authorised financial planning partner. The right question is not “what do I do with my pension?” but “what does my whole estate look like, and where does the pension fit in?”
What to Avoid
- Cashing in a large pension in one tax year and pushing yourself into the additional rate of income tax for no estate planning gain.
- Naming an adult child as primary beneficiary when their estate is already above the nil-rate band.
- Leaving an out-of-date expression of wishes that names a former spouse or deceased relative.
- Buying an annuity to escape April 2027 without modelling the legacy and income trade-offs.
- Assuming death-in-service benefits enter the estate. They remain exempt from 6 April 2027.
Frequently asked questions
Pensions & Retirement
Are death-in-service benefits affected by the April 2027 pension change?
No. HMRC has confirmed that death-in-service benefits paid from registered pension schemes (including NHS, civil service and most workplace schemes) remain outside the inheritance tax estate from 6 April 2027. The change applies to unused pension funds, not death-in-service lump sums.
Will my spouse inherit my pension free of inheritance tax after April 2027?
Yes. The spousal exemption under Section 18 of the Inheritance Tax Act 1984 continues to apply to pensions passing to a spouse or civil partner. The exemption applies to spouses and civil partners only, not unmarried partners.
Can I still use my pension as an inheritance vehicle after April 2027?
Yes, but the tax advantage narrows. Unused defined contribution pension funds enter your estate for inheritance tax from 6 April 2027 under Finance Act 2026. The spouse exemption still applies. For non-spouse beneficiaries, the combination of IHT and income tax on inherited drawdown could exceed 50% above age 75.
Where to take this next
April 2027 changes the structure of UK retirement and estate planning, not the underlying principles. The right plan depends on your full estate and family circumstances.
You should engage with a firm that can give you financial planning, tax advice, legal advice and accountancy advice under one client relationship, with regulated financial advice referred to our independent FCA-authorised partner firm and legal drafting handled by qualified solicitors employed within our business.
You should work with advisers who coordinate financial planning, tax advice and legal work under one client relationship — with clear disclosure of who is regulated for what. Bluebond Tax Planning Ltd provides tax planning and coordination only; any advice on your investments, personal pension or annuity is FCA-regulated and referred to our independent partner firm — no company in the Bluebond group is FCA-authorised or an SRA-authorised law firm. Individual outcomes depend on personal circumstances and cannot be guaranteed.
If you need any help or advice in this complex area please contact us. We will help you mitigate your inheritance tax.
Bluebond’s free webinar covers the inheritance tax and pension changes in detail. For a tailored review, the IHT Mitigation Plan places the pension alongside every other moving part. For the wider explainer, see Bluebond’s guide to inheritance tax on pensions.
Disclaimer. The information in this article is general in nature and does not constitute personal financial, tax, or legal advice. UK tax legislation changes frequently, and the specific application of any rule or strategy depends on individual circumstances. Figures, thresholds, and reliefs mentioned are correct as of the 2026 to 2027 tax year unless otherwise stated. Before acting on any information here, consult a qualified adviser who has reviewed your full situation. Bluebond Tax Planning provides personal recommendations only under a signed client agreement, following a full review. Bluebond Tax Planning operates under UK legal frameworks and recognised professional conduct standards. Tax planning and legal work are not FCA regulated.
