Price Ferguson Farnham Insights · Pensions & Retirement Planning
From 6 April 2027, most unused pension funds and pension death benefits will count towards the value of your estate for Inheritance Tax (IHT). Until now, pensions have sat outside the estate. For families with significant pension savings, that is a meaningful change, and one worth understanding well ahead of time.
The good news is that you do not need to rush into big decisions. This guide walks through what is changing, who may be affected and some sensible questions to ask yourself.
Under the current rules, unused money in most defined contribution pensions can usually be passed on without an IHT charge.
From 6 April 2027, most unused pension funds and death benefits will be added to the rest of your estate when IHT is calculated. This was legislated in the Finance Act 2026, which received Royal Assent on 18 March 2026.
A few points are worth keeping in mind:
Your unused pension will be looked at alongside your other assets, such as:
IHT is currently charged at 40% on the taxable value of an estate above the available allowances. For many people the standard nil-rate band is £325,000. An additional residence nil-rate band of up to £175,000 may be available where a home is left to direct descendants, subject to conditions. Married couples and civil partners may also transfer unused allowances. The residence nil-rate band is gradually reduced for estates worth more than £2 million.
Pension benefits left to a spouse or civil partner can generally still benefit from the spouse or civil partner exemption, so an immediate IHT charge would not be expected.
The picture changes when the second person dies. Whatever remains, including inherited pension money, may then form part of their estate. For couples, it is usually helpful to look at both estates together. Exemptions can also depend on individual circumstances, including residence and domicile status.
In short, yes. IHT and Income Tax are separate taxes, and both can be relevant when pension benefits are inherited.
The legislation includes provisions to prevent the part of a pension used to pay IHT from also being taxed as income. Even so, the way the two taxes interact can be complex, so it is wise to look at the whole picture.
No. Some benefits are excluded, including:
Different types of pension are treated differently, so it helps to understand exactly what each of your arrangements provides.
Potentially, particularly where pension savings sit within a larger estate. Take someone approaching retirement with a £600,000 pension, a £650,000 home and £250,000 in ISAs and other investments. Their assets total £1.5 million, and the new rules would bring more of that wealth into the IHT calculation.
For people in this position, the question is not only how to fund retirement. It is also how your assets might best support you while you are here, and how that fits with what you would like to leave to others.
Not necessarily. Withdrawing money purely to reduce a possible IHT bill can have downsides, for example:
The right answer depends on your income needs, tax position and long-term goals. For some people, keeping their pension as it is will remain sensible. For others, a carefully planned approach may be worth considering. Decisions are best made as part of a full financial plan, not because of one tax change alone.
1. Get a rough picture of your estate. Add up your property, savings, investments and pensions, and note any debts. This can show whether the new rules might be relevant to you.
2. Check your pension nominations. Make sure your pension providers hold up-to-date wishes about who should receive your benefits. Trustees or administrators may still have discretion, but current nominations help them understand your intentions. Review them alongside your Will.
3. Look at your retirement income plan. The order in which you use pensions, ISAs, cash and other investments can affect your Income Tax, your flexibility and what may be left for others. Thinking about income and inheritance together is more important than before.
4. Think about the people who matter to you. Estate planning is about more than tax. It is about making sure the people who rely on you are supported and your wishes are clear. Some families explore lifetime gifts, trusts, charitable giving or protection cover. Each has different tax, legal and financial implications, and not all of them will suit everyone.
5. Consider joined-up advice. Pensions, investments, IHT and estate planning are closely linked. A financial adviser can help you see how they fit together and, where appropriate, work alongside a solicitor or tax specialist.
From April 2027, the deceased person’s personal representatives (usually the executors or administrators) will generally be responsible for reporting and paying any IHT due on unused pension funds and death benefits. In some circumstances, beneficiaries may also be responsible for tax linked to the benefits they receive.
HMRC is developing processes to help personal representatives and pension administrators share information and, in certain cases, pay the tax from pension funds. Administering an estate with significant pension wealth may be more involved than before, so it can help to keep clear records of your pensions and let your executors know where to find them.
Will all pensions be taxed at 40% from April 2027? No. Most unused pensions will count towards the estate, but the 40% rate normally applies only to the taxable value above the available allowances, after exemptions and reliefs.
Do the new rules apply if I die before 6 April 2027? No. They apply to deaths on or after that date. Earlier deaths are dealt with under the existing rules, even if benefits are paid out later.
Can I still leave my pension to my spouse? Yes. Benefits passing to a spouse or civil partner can generally still qualify for the exemption.
Will my children pay Income Tax on an inherited pension? It depends on your age when you die, the type of benefit and how it is paid. IHT may also need to be considered separately.
Should I withdraw my pension to avoid IHT? Not without looking carefully at the wider effects. Withdrawals can create Income Tax and affect your retirement security.
Do I need to change my Will? Not everyone will. But these changes are a good prompt to review your Will, pension nominations and wider plans together.
Looking ahead
The April 2027 changes alter how pensions are treated when wealth passes to the next generation. For people with larger pensions, property or investments, they could affect how much their families receive.
Still, good planning is never only about tax. Your retirement income, security, goals and family all matter. Taking time to review your arrangements, calmly and in good time, can help your plans reflect what is most important to you.
Talk to us
Price Ferguson Farnham provides financial advice to help individuals and families with their pensions, investments, retirement and long-term plans. If you would like to understand how these changes might affect you, we would be happy to have an initial conversation about your circumstances and objectives.
Email:info@pricefergusonfarnham.com
Phone: 01253 235875
Importantformation. This article is for general information only. It is not personal financial, investment, legal or tax advice, and it does not take account of your circumstances. Tax rules and allowances may change, and their value depends on individual circumstances. The value of investments and pension funds can fall as well as rise, and you may get back less than you invested. Information reflects legislation and HMRC guidance available as at November 2026. Estate planning and trusts may need specialist legal or tax advice.
