Pensions and inheritance tax: what changes in 2027, and what it means for you

Perhaps you saw a headline. Perhaps someone mentioned it at the golf club, or your daughter sent you a link. From April 2027, the money left in your pension when you die will count towards inheritance tax.

If your first thought was that you should do something, quickly, you're not alone. Pensions have long been one of the more sensible things to leave behind. Now that's changing, and changes to tax rules have a way of making people feel they're already behind.

But acting quickly is how people make decisions they later regret. And for a lot of readers, this change won't mean a tax bill at all.

So it's worth slowing down. Here's what's actually changing in 2027, how to work out whether it affects you, and what to think about before you do anything you can't undo.

What's changing, and when

At the moment, most pension pots sit outside your estate when you die. That's because the scheme decides who receives the money, rather than your will.

From 6 April 2027, that ends. Most unused pension money, and most lump sums paid out on death, will count as part of your estate. Inheritance tax is charged at 40 per cent on anything above your thresholds, and those thresholds are the subject of the next section.

The date is the date of death, not the date you take the money. Someone who dies before 6 April 2027 is covered by the current rules. And this isn't a proposal: it was announced in the Budget of October 2024, became law in March 2026, and the government has published its own account of the measure.

There's a second tax worth knowing about, and it isn't changing. If you die after the age of 75, whoever inherits your pension pays income tax on whatever they take out of it, at their own rate. If you die before 75, usually they don't. From 2027, inheritance tax can apply on top of that income tax. It's why the change matters more than the 40 per cent headline rate suggests.

If you want a refresher on the wider picture, Pense's guide to how pensions are taxed covers the basics.

Whether it affects you at all

Most estates pay no inheritance tax. The government's own estimate is that around 10,500 estates will become liable for the first time because of this change, out of roughly 213,000 with pension wealth. Most, in other words, still won't pay it.

The reason is the thresholds. Everyone can leave £325,000 free of inheritance tax. If your home passes to your children or grandchildren, there's a further allowance of up to £175,000. So one person can often pass on £500,000 before any tax is due.

For married couples and civil partners, it roughly doubles. Anything you leave to your husband, wife or civil partner is free of inheritance tax, however much it is, and that will include pension money after April 2027. Whatever thresholds you don't use pass to them too. So a couple leaving a home to their children can often pass on £1 million between them.

Both thresholds are frozen until April 2031.

If you've already bought an annuity, much of this may pass you by. An annuity turns your pot into an income, so there's usually no unused fund left to count. Income that continues to a surviving spouse isn't caught either. A guarantee period or value protection can work differently, so it's worth checking what your own annuity includes.

Now the part that's less comfortable. Adding a pension to the sums changes them. A house worth £350,000 and a pension of £120,000 gets you to £470,000, before savings, the car or anything else. For a couple, that's still comfortably inside the thresholds. For a single person, a widow or widower, or someone divorced, it may not be.

The freeze matters here too. House prices and savings tend to rise. The thresholds don't. So estates that sit below the line today may not in ten years.

There's no rule of thumb that settles this. It depends on what you own, who you're leaving it to, and whether you're part of a couple.

Why moving the money doesn't move the problem

If the change does affect you, the obvious response is to take the money out. Here's why that doesn't work on its own.

Inheritance tax is charged on what you leave behind. Move £50,000 from your pension to a savings account and you still have £50,000. It's in a different place, that's all. Your estate is the same size.

Taking money out has its own cost, too. Usually up to a quarter of your pension can be taken tax-free. The rest is taxed as income in the year you take it. Take a large amount in one go and part of it may be taxed at a higher rate than you're used to paying, and as we've written before, a lot of pension decisions are hard to reverse once made.

So you could pay income tax now, and inheritance tax could still be due later. Two tax bills. No benefit.

What does take money out of an estate

Only two things. Spending it, and giving it away.

Spending is the one people overlook. If you've got more than you're likely to need, the money in your pension is there to be used. The holiday you keep postponing. Helping a grandchild through university. Money you spend in your lifetime isn't in your estate when you die, and you were there to enjoy it.

That isn't a licence to spend without thinking. A pot can run out, and that risk runs the other way. But plenty of people are more cautious than they need to be, and a change in the tax rules is as good a moment as any to ask whether you're one of them.

Giving money away is the other route, and it comes with rules. Most gifts count as part of your estate if you die within seven years of making them. There are exceptions, including an annual allowance and regular gifts made out of income you don't need. They reward planning ahead, so they're worth understanding before you make a large gift.

Both routes lead to the same question. How much do you actually need? Not really a tax question. It's about what your retirement costs, how long it has to last, and what else you have coming in.

What's worth doing now

Some of the detail will change between now and April 2027. HMRC still has guidance to publish, and the rules on how schemes and executors handle it all are still being finalised. The Chancellor, John Healey, delivers his first Budget on 28 October, and Budgets are where tax rules get revisited.

None of that stops you understanding your own position. What you own, roughly what it's worth, who you'd want it to go to, and whether the thresholds apply to you. Most people have never added it up. It doesn't take long, and it tells you whether this is something you need to think harder about or something you can set aside.

If it turns out you do need to think harder, the questions that follow are about your whole retirement, not just tax. How much income you need. How long it has to last. What happens to it when you're gone. A regulated adviser can work through that with you, and firms like Pense advise on retirement income for pots from £20,000 upwards.

What this change doesn't require is a quick decision. Pension choices are hard to reverse, and there's time.