How will the 2027 inheritance tax changes affect your pension?
Written by Boring Money
22 April, 2026
From April 2027, unused defined contribution pension pots will fall within the scope of inheritance tax for the first time since 2014. This means pensions are no longer an effective tool for passing wealth to family tax-free. The change affects how retirees should draw down their pension, in what order they use their assets, and how they approach gifting and estate planning. With a double tax charge possible in some cases — IHT at 40% plus income tax on withdrawals — experts say it's worth reviewing your retirement strategy now, before the rules come into force.
What's changing with pensions and inheritance tax in April 2027?
A big change is coming for pensions in April 2027, and investors have just 12 months to prepare. At that point, pensions will be subject to inheritance tax. By ripping up the rules on the inheritability of unused pensions, the Chancellor has disrupted the carefully laid tax plans of many families. This could bring many people into the inheritance tax net for the first time, and increase the bills for many others.
This is a big change. Until recently, the inheritance tax rules around pensions were generous. In 2014, then Chancellor George Osborne changed the rules, allowing people to pass on their unused defined contribution pension pots
free from inheritance tax. Those receiving the pensions also received tax breaks, particularly if the owner of the pension passed away before age 75.Retirees could nominate anyone to receive the pension pot and to carry on taking an income from it. This includes those under 55, such as children and grandchildren. Pensions became a tool to create an effective ‘family trust’, with many families letting the pension pot build up over time and only taking it at the last possible moment.
The new rules turn this long-term planning strategy on its head. While the exact details are still being debated by parliament, from April 2027, unused pension fund assets will fall into the scope of inheritance tax. This has implications for how people use their pensions later in life.
Will my pension be subject to inheritance tax?
The first and most important point is that, rather than waiting, it is once again advantageous to use up the pension pot before other sources of wealth. Defined contribution pensions face potentially onerous tax treatment on death, especially if the person who dies is over 75 and the beneficiary is subject to the higher or additional rates of income tax
.Jason Hollands, managing director at Evelyn Partners, points out that unused pension assets could be subject to both IHT on death at 40%, and where death occurs after age 75, beneficiaries may also need to pay income tax on withdrawals at their marginal rate – up to 45%. This makes for a prohibitive tax rate and changes many of the considerations on estate planning.
The ability to leave an unspent pension pot to your loved ones tax free has been one of the few perks of having a defined contribution pension fund rather than a final salary defined benefit scheme where the risk sits on the shoulders of your employer. Under the new rules which are set to go ahead next April, that benefit will be materially reduced, and in some cases, families could face a double layer of taxation.
Should I start drawing down my pension before 2027?
With pensions potentially now less attractive for intergenerational planning, leaving them untouched no longer makes sense. Hollands says retirees should consider making the pension a primary source of income instead.
Options include increasing pension withdrawals during lifetime and making financial gifts to family members, either directly or via trusts. While the £3,000 annual gifting allowance remains available, larger gifts may fall outside the estate for IHT purposes as Potentially Exempt Transfers if the donor survives seven years.
It will change the investment considerations. If people were using pensions to pass on, it made sense to take more investment risk with the underlying assets. However, if they are using it to create an income, potentially to give gifts, they will need a different blend of assets. This may include fixed income options, such as government and corporate bonds, or dividend strategies.
Fidelity’s Marianna Hunt says the new IHT rules could make annuities a more attractive option.
Annuities provide a secure income stream, and any surplus income could then be gifted to your loved ones using the ‘normal expenditure out of income’ allowance.
This is another form of gifting, in addition to the £3,000 allowance and potentially exempt transfers. It allows for regular gifts, as long as donors can prove that it doesn’t diminish their standard of living.
Hollands says taking out whole-of-life insurance policies, written in trust, are another possibility as these can be used to help cover future IHT liabilities,
Although costs can be significant, particularly later in life.
How does the IHT pension change affect ISAs?
ISAs become more important in this environment. Previously, it made sense for retirees to use their ISA assets ahead of their pension assets, but now the opposite is true. That means using your £20,000 ISA allowance in full, where possible, every year.
Since April 2015, it has been possible to effectively pass on your ISA to a surviving spouse or civil partner without the loss of tax-free income and growth. On death, the surviving spouse or civil partner receives a one-off ISA allowance equal to the total value of the ISA (the Additional Permitted Subscription (APS) allowance).
Can I move money from my SIPP to an ISA?
You cannot directly transfer funds from a SIPP to an ISA. However, if you are over 55 (57 from 2028), you can withdraw money from your SIPP, which is taxed, and then pay it into an ISA, subject to annual ISA limits.
It may also change the investment approach for your ISA. Just as it now makes more sense to put income-generating assets in your pension, it also makes sense to put higher growth assets in your ISA, though this will depend on your circumstances.
Overall, it will mean that investors need to be smarter on their IHT planning. This is a complicated area and good financial advice can save you from some costly mistakes. There are signs that people are starting to change their behaviour – and not always in a good way. Research from Lubbock Fine Wealth Management says 116,000 individuals made lump-sum withdrawals from their pensions as soon as they could (i.e. aged 55) in the last year, up from 110,000 the previous year and a five-year high. The total value withdrawn by those aged 55 also reached a five-year high of £2.3bn, up from £2.1bn the previous year.
More people have been taking lump sum withdrawals from their pensions following the announcement…many are rushing to take money out as soon as they can to help mitigate what they see as excessive tax bills for their dependents.
The problem is that they may expose themselves to higher tax bills if they don’t withdraw carefully.
The new rules change the game for how people should approach their retirement planning, and the order in which they should use their pension savings. With one year to go, it is worth acting now to mitigate the impact.
