Pensions and Inheritance Tax: What the April 2027 Changes Mean for You

For decades, pensions have been one of the most tax-efficient ways to pass on wealth. Unlike most other assets, unused pension funds have sat outside your estate for inheritance tax purposes — meaning they could be passed to your beneficiaries free of IHT, regardless of how large the pot.

That is about to change. From April 2027, the government will bring unused pension funds within the scope of inheritance tax for the first time. It is one of the most significant changes to estate planning in a generation, and it affects anyone with pension savings they are not planning to draw down fully in retirement.

What exactly is changing?

Under the current rules, your pension pot sits outside your estate. When you die, your pension provider pays the remaining funds directly to your nominated beneficiaries — and because the money never forms part of your estate, no IHT is charged.

From April 2027, this changes. Unused pension funds will be counted as part of your taxable estate. That means they will be added to the value of your property, savings, investments, and other assets when calculating whether IHT is due — and at what rate.

The standard IHT rate remains 40%, charged on the value of your estate above the nil-rate band (currently £325,000, or up to £500,000 with the residence nil-rate band when a main home is left to direct descendants).

Who is most affected?

The change will affect anyone whose total estate — including their pension — exceeds the available nil-rate band thresholds. In practice, that means:

• People with large pension pots they are unlikely to draw down fully in retirement
• Those who have deliberately left pensions untouched as a legacy planning tool
• Retirees in income drawdown with a remaining pension fund
• Anyone whose estate is already close to or above the nil-rate band — adding a pension pot could push them significantly over the threshold

For example: a couple with a combined estate of £600,000 and £200,000 in unused pension savings could see their IHT liability increase by up to £80,000 under the new rules — without any other changes to their circumstances.

Why does acting now matter?

The April 2027 deadline is less than two years away. While that may feel like a long time, estate planning changes often take time to implement — particularly those involving trusts, gifting strategies, or restructuring pension arrangements. The earlier you review your position, the more options you will have.

Waiting until 2027 to act could mean missing the window to make meaningful changes. Some strategies — such as potentially exempt transfers (gifts that fall outside your estate after seven years) — need to be started well in advance to be effective.

What can you do about it?

There is no single solution that works for everyone. The right approach depends on your individual circumstances — the size of your pension, the rest of your estate, your income needs in retirement, and your intentions for passing on wealth.

Options worth exploring with an independent financial adviser include:

• Reviewing and updating your pension nominations
• Adjusting your drawdown strategy to reduce the pension pot subject to IHT
• Exploring gifting strategies and potentially exempt transfers
• Considering trust arrangements for life insurance or other assets
• Reviewing your will to ensure it reflects the new rules

The key is to get a clear picture of your current position and understand your options before the deadline arrives.

Get independent advice before April 2027

At SBC Financial, we are helping clients across East Lothian and central Scotland understand exactly how the April 2027 changes affect their estate — and what steps they can take now to protect what they have built.

As an independent financial adviser, we are not tied to any product provider. Our advice is always based on your best interests, not commission targets.