With pensions falling into the IHT net from April 2027, taking the necessary steps now can help protect your legacy before the changes move against you.
Pensions have long been a cornerstone of estate planning in the UK, largely because many types of pensions can pass to beneficiaries without Inheritance Tax (IHT) deductions. However, with significant changes coming in April 2027, it’s never been more important to assess whether your pension is truly IHT-proof.
What is changing?
Under current UK rules, most Defined Contribution (DC) pensions do not form part of your estate for IHT. This means they can be passed to your beneficiaries without the 40% tax charge that could apply to other assets such as property or ISAs after the use of allowances and exemptions.
Under the new regime, however, unused pension assets – such as a Self-Invested Personal Pensions (SIPP), or death benefits from a Defined Benefit (DB) pensions – will fall into the estate. Personal representatives will be liable for reporting and paying any IHT due on unused pension funds and death benefits. This rule change is shifting the wealth transfer landscape, prompting many to rethink how their wealth can be optimised and passed on.
Understand your pension type
First, review and confirm the type of pension you hold. DC pensions are usually a fund with an underlying investment value. These schemes generally offer greater flexibility when it comes to death benefits. Under current rules, any unused funds can be passed to beneficiaries free of IHT if the member dies, so long as it occurs before the upcoming rule changes in April 2027. However, the options available to your beneficiaries will depend on the specific DC pension scheme you are a member of, as some provide more flexibility than others.
By contrast, DB schemes pay an annual/monthly pension to the member once it comes into payment and does not usually have a residual fund value. There is often a provision for beneficiaries if the member passes away before or after the pension comes into payment as a pre-agreed percentage of the pension amount. Typically, this is limited to spouses or non-adult children, but this is also dependent on the specific scheme rules that apply.
Review your beneficiary arrangements
You must update your pension nomination/expression of wish form. Pension funds are usually held in trust, and it is the trustees’ (usually the pension administrator’s) responsibility to allocate funds to beneficiaries.
An expression of wish form helps the pension provider to distribute the funds in line with your wishes. Outdated or unclear beneficiary instructions can inadvertently mean that the funds are not distributed in line with your wishes or lead to unintended IHT liabilities.
Example: David failed to update his nomination form after remarrying. On his death, the pension defaulted to his ex-spouse, resulting in a lengthy legal dispute and unexpected tax complications for his intended beneficiaries.
Model your pension’s IHT exposure
Consider your pension pot’s knock-on effect on your estate. Even if other assets remain below the IHT threshold, a large unused pension could push the estate into tax territory, especially after April 2027 changes.
Model different scenarios, such as death before or after age 75, or leaving the pension to a spouse versus a child. Factor in potential growth of the fund and any planned pension withdrawals. Using financial planning tools or seeking professional ad-vice can help estimate potential IHT liabilities and preserve tax-efficiency.
[i] With IHT reform changes looming, now is the time to review your pension and IHT strategy. Call 03300 564 446 to directly speak with a financial expert, or get in touch via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
