Your Pension Could Face a 40% IHT Bill — Here's What's Changing in April 2027

For decades, pensions have been one of the most tax-efficient ways to pass wealth to the next generation. Funds held in a defined contribution pension sat outside your estate for Inheritance Tax (IHT) purposes — meaning they could be passed to beneficiaries free of the 40% charge that applies to other assets.

From 6 April 2027, that changes.

What the new rules mean

Under changes announced by the UK Government, unused pension funds will be brought into your estate for IHT purposes. This means that on death, any unspent pension pot will be added to the value of your other assets — property, savings, investments — and taxed at 40% on everything above the nil-rate band.

The nil-rate band is currently £325,000. With the residence nil-rate band (for those passing a family home to direct descendants), the threshold can rise to £500,000 for individuals, or up to £1 million for married couples and civil partners.

For anyone with a substantial pension pot, the impact could be significant.

Who is most affected?

The change is most likely to affect people who:

• Have a defined contribution pension (personal pension, SIPP, or workplace DC scheme)
• Have other assets — property, savings, ISAs — they plan to draw on first in retirement
• Have a pension pot that, combined with other assets, takes their estate above the nil-rate band
• Planned to use their pension as a vehicle for passing wealth to children or grandchildren

Defined benefit (final salary) pensions work differently and are largely unaffected by these changes.

Why the planning window matters

Some of the most effective strategies for reducing IHT exposure take time to implement. Trust arrangements need to be properly structured. Gifting plans need to be in place for at least seven years to be fully effective. Drawdown strategies need to be reviewed and adjusted.

Waiting until March 2027 to act is, in most cases, leaving it too late.

The good news is that there are legitimate, well-established strategies available — but they work best when there is time to plan properly.

What you can do now

The right approach depends on your individual circumstances — the size of your pension, your other assets, your family situation, and your income needs in retirement. There is no one-size-fits-all answer.

What is clear is that this is a significant change that affects a large number of people, and that early advice is far more valuable than last-minute action.

At SBC Financial, we are helping clients across East Lothian and the Edinburgh area understand exactly what these changes mean for them — and what steps they can take to protect their estate.

SBC Financial is authorised and regulated by the Financial Conduct Authority (FCA ref: 997666). The value of investments can fall as well as rise. Tax treatment depends on individual circumstances and may be subject to change. This article is for information purposes only and does not constitute personal financial advice.