Inheritance tax and pensions: what the 2027 changes mean for UK families

Key inheritance tax reforms announced in the 2024 Labour Budget

In the October 2024 Labour Budget, much attention focused on Rachel Reeves’ changes to Agricultural Property Relief. However, another proposal – bringing unused pension funds within the scope of Inheritance Tax (IHT) from April 2027 – could have the greatest long-term impact on UK retirement and estate planning.

Why pensions have been a key tool in estate planning

Since the pension freedoms introduced in 2015, pensions have been one of the most effective ways to pass wealth to the next generation.

Pension funds have generally sat outside the estate for IHT purposes.
Generous tax relief on pension contributions made them an attractive long-term savings wrapper.
Many advisers encouraged clients to spend other assets first and preserve pensions for later (“first in, last out”).

The 2027 reform will fundamentally change this landscape.

How the 2027 pension and inheritance tax changes will work

From April 2027, unused pensions will be included in the taxable estate for IHT purposes. While pensions will remain valuable for retirement savings, their role as an intergenerational planning tool will diminish.

At present:

Pensions are exempt from IHT on death.
If the pension holder dies after age 75, beneficiaries pay income tax on withdrawals but not IHT.

After April 2027:

Double taxation risk emerges. Pensions could face IHT on death and income tax when beneficiaries withdraw funds.

Impact on the Residence Nil Rate Band (RNRB)

The Residence Nil Rate Band (RNRB) is worth up to £175,000 per person in addition to the standard £325,000 nil rate band. It tapers for estates over £2 million.

Currently, pensions are excluded from the £2m calculation. From 2027 they will be included, meaning more families will lose some or all of the RNRB.

Example: James and Janet

Before April 2027: With £2m in assets and £800,000 in pensions, they could pass on £2.4m after tax.
From April 2027: Their estate rises to £2.8m, losing RNRB entitlement. Their heirs would receive only £1.94m, more than doubling their IHT bill overnight.

What families should do now

If you are concerned about the impact of the inheritance tax changes, consider:

Updating your Will so it reflects your wishes.
Ensuring your pension expression of wish forms are current, as pension trustees – not your Will – decide who receives pension benefits.
Reviewing your retirement cashflow plan to identify which assets you need for retirement and which could be used for estate planning.
Exploring estate planning strategies such as gifting, trusts, or life insurance to mitigate IHT exposure

Get in touch for professional advice

At The Penny Group, we can help you to:

Identify the most efficient strategy for your goals
Make full use of available exemptions
Ensure you remain compliant with HMRC rules

With the upcoming changes to pension treatment and increased IHT exposure, now is a good time to act.

Remember, all decisions should be considered in the context of your own personal circumstances.

If you wish to discuss your financial position and the options available to you, please contact one of our advisers.

You can reach us at info@thepennygroup.co.uk or on 0207 061 2345.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

Will Writing is not regulated by the Financial Conduct Authority.

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