Pension Inheritance Tax Changes 2027 – What They Mean for Your Estate Planning

The goverment will apply inheritence tax to unspent pensions from 2027

Have We Been Guilty of Having Our Cake and Eating It?

For years, pensions have offered one of the most generous combinations of tax benefits in the UK. They’ve allowed us to grow our wealth, reduce our tax bill, protect assets from inheritance tax, and still have full access to our money in retirement.

The benefits of the current system:

• Tax relief on contributions – Immediate tax savings when adding to your pension.

• Tax-free growth – Investments inside your pension grow free of income tax and capital gains tax.

• Inheritance tax advantages – Pensions left in drawdown and passed to beneficiaries are currently free from inheritance tax.

• Full control – You remain in control of your pension while alive, with the ability to draw income and access capital as needed.

The Change from 2027

The Labour Government has announced that from April 2027, pensions will be included in your estate for inheritance tax (IHT) purposes.

A Quick Refresher on IHT Allowances

• Nil Rate Band – Each individual can pass on up to £325,000 free from IHT.

• Residence Nil Rate Band – Potentially an extra £175,000 per person when leaving your home to direct descendants.

• For estates worth over £2 million, the Residence Nil Rate Band is tapered away – and disappears entirely for larger estates.

Historically, for wealthier families, the advice was often to leave the pension until last because of the IHT benefits. This change flips that planning on its head.

What Can Be Done Now?

Here are some potential strategies to consider in light of the 2027 changes:

1. Plan for the increased tax bill
   Use some of your pension to produce an income and take out a whole of life insurance policy, written into trust, to create a tax-free lump sum on death for your beneficiaries.

2. Change your income strategy
   Start drawing from your pension and redirect your cash investments into IHT-friendly investments such as:

   • AIM-listed funds qualifying for Business Relief – The first £1 million per person is exempt from IHT after just two years’ ownership. These can be more volatile than standard diversified portfolios.

   • Trust-based investments – There are many types, including those allowing capital access, income access, or no access at all. Most start the 7-year rule for gifts, but options like discounted gift trusts can reduce the taxable estate immediately.

3. Start gifting now

   • Regular gifts from surplus income are immediately exempt from IHT.

   • Lump-sum gifts start the 7-year countdown for full exemption.

The Bottom Line - Review Your Estate Plan Now

The rules are changing, and with them, the best strategies for protecting your wealth. Everyone’s situation is different — your age, income needs, family circumstances, and investment portfolio all influence the right approach.

We offer a free initial consultation to help you find the solution that fits your goals and protects your loved ones.

📞 Call us today 03003 034674 or complete the form below to discuss how to adapt your pension and estate plan before 2027.

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