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Careful Inheritance Tax (IHT) planning ensures your loved ones receive as much of your wealth as possible when the time comes.
Under current IHT rules, pensions are a powerful tax planning tool, and as such, they may be central to your estate plan.
However, a landmark reform of IHT is due to come into effect on 6 April 2027, which could make pensions a less effective estate-planning strategy.
And yet, worryingly, research by Standard Life reveals that 89% of UK adults have little or no awareness of the upcoming changes.
Keep reading to discover our answers to the questions we’re asked most often about the planned IHT reforms and find out how to reduce a potential tax bill for your beneficiaries.
How does Inheritance Tax on pensions work now?
IHT is a tax on the estate (the property, money, and possessions) of a person who has died. It’s usually only charged on estates valued at more than £325,000. If you’re passing on your main home to direct descendants, your threshold could increase to £500,000.
In the UK, the standard IHT rate is 40%, which is payable on the portion of an estate that’s above available thresholds.
In the 2026/27 tax year, most unused pension funds and lump-sum death benefits sit outside a person’s estate for IHT purposes. This means your chosen beneficiary won’t usually face an IHT bill on any pension wealth you leave them.
What’s changing and when?
From 6 April 2027, most unused pension funds and death benefits will no longer be exempt from IHT. Instead, they’ll be treated like any other assets and will count towards the value of your estate.
This could mean that your pension wealth pushes the value of your estate beyond – or further beyond – available thresholds, increasing the amount of IHT your beneficiaries pay.
Will I be affected by the new rules?
The government estimates that in 2027/28, 10,500 estates will have an IHT liability where previously they would not. A further 38,500 estates will pay more IHT than they would have under the previous rules.
However, most estates will still fall below the thresholds for IHT and therefore continue to have no liability after the reform comes into force.
You can also still pass on pensions to your spouse or civil partner without triggering an IHT charge, regardless of how much your estate is worth (more on this later), although there may be other taxes to pay.
Additionally, there are several exceptions to the new rules. For example, death-in-service benefits and certain ongoing payments to a spouse or civil partner from a defined benefit (DB) pension will not normally incur IHT.
If you’re unsure about how the new legislation will apply to your pensions, you might benefit from speaking to a financial planner who can help you understand and prepare for any changes in liability.
Who will be responsible for paying an Inheritance Tax bill on my estate?
From 6 April 2027, the responsibility for reporting and paying IHT on pensions will fall to the personal representatives (executors of your will or court-appointed administrators if you leave no will) of your estate.
IFA Magazine has warned that this change places an onerous burden on personal representatives, who will be “responsible for paying IHT on pensions they do not control”.
Moreover, there is normally a six-month window from the end of the month of death to settle an IHT bill. And yet, pension scheme providers often take several years to provide the information required to calculate IHT liability.
As such, you might want to rethink who to appoint as the executors of your will, as they’ll need the capacity to engage with a potentially complex and lengthy process. Equally, it’s worth taking stock of your commitments and responsibilities as an executor under the new rules to ensure you’re prepared for what’s involved.
I’ve heard about a risk of “double taxation” under the new rules; what does this mean?
If you die on or after your 75th birthday, the beneficiaries of your pension will pay Income Tax on any withdrawals they make.
There has been considerable speculation that this could mean beneficiaries face both IHT and Income Tax on any pension wealth they inherit after 6 April 2027.
However, the government issued a technical note in May 2026 to clarify that:
- Where IHT is due, it will be applied to a pension first
- Beneficiaries will only pay Income Tax on the remaining amount (after IHT has been paid).
How can I minimise a potential Inheritance Tax bill for my loved ones?
If you’d been planning to preserve your pension wealth to pass on tax-efficiently to loved ones, it might be time to rethink your approach.
While you might not be able to avoid an IHT bill altogether, you could reduce your estate’s liability by:
- Spending more of your pension wealth now – This could reduce the value of your estate for IHT purposes. A financial planner can help you withdraw from your pension sustainably to reduce the risk of running out of money too soon.
- Gifting money to loved ones during your lifetime – Make the most of your annual gifting allowances to pass on some of your wealth IHT-free. The rules around gifting can be complex, so it’s important to speak to a financial planner who can ensure you make effective use of available allowances.
- Leaving a charitable legacy – Donating at least 10% of your net estate (after debts, reliefs, and other exemptions are deducted) to an eligible charitable cause in your will reduces the IHT rate on the rest of your taxable estate from 40% to 36%.
Get in touch
If you still have questions about how the new Inheritance Tax rules could affect your pensions and estate plan, we’d love to hear from you.
To find out more about how we can help, please email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, or will writing.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Approved by Best Practice IFA Group Ltd on: 20/8/26