Pensions, IHT and the end of an era: planning for the 2027 rule change
For decades, pensions have been an important part of intergenerational wealth transfer for many clients. Typically held outside the estate for Inheritance Tax (IHT) and, in some cases, payable free of income tax to chosen beneficiaries on death before age 75, they have been a tax efficient way to pass wealth to children and grandchildren. From 6 April 2027, most unused pension funds and death benefits are expected to be brought into the scope of inheritance tax, altering this position.
What is changing
The change brings unused pension funds, whether uncrystallised or not yet drawn down or annuitised, into the valuation of the deceased’s estate for inheritance tax purposes. Pension death benefits are also affected. In the first instance, personal representatives, rather than pension scheme trustees, will be responsible for reporting and paying any inheritance tax due on these funds.
There is relief for couples. Pension assets left to a surviving spouse or civil partner will remain exempt from inheritance tax, even though those assets form part of the estate under the new rules. However, this exemption does not extend to children or other beneficiaries, and with the standard nil rate bands frozen until 2031, the proportion of estates affected is likely to increase over time.
The legislation is now in place. The Finance Act 2026 received Royal Assent in March 2026, applying these changes to deaths on or after 6 April 2027.1
What this means for you
If your pension forms a significant part of the wealth that you intend to leave to your children, it could be subject to inheritance tax at 40%, alongside any income tax your beneficiaries may pay when drawing down on the funds. This will result in a higher effective tax rate than under the current regime. For those with substantial pension wealth alongside other assets, this represents a change that may prompt a review of your overall estate plan, not just your pension arrangements.
Tax efficient options to consider
Life insurance for inheritance tax
A whole of life policy, typically written in trust so the proceeds fall outside your estate, can provide funds that may be used to meet an inheritance tax liability without the need to sell illiquid assets or draw down pension funds. For couples, a joint life second death policy may be a more cost efficient structure, as inheritance tax is typically assessed on the second death.
Gifting during your lifetime
Regular gifts from surplus income, the annual £3,000 exemption, and larger gifts that may become exempt after seven years, known as potentially exempt transfers, remain commonly used approaches. With pensions potentially within scope of inheritance tax, some clients may revisit the order in which they draw down assets in retirement.
Trusts
Placing assets, or the proceeds of a life policy, into trust can keep wealth outside your estate while providing a degree of control over how and when beneficiaries may access it. Discretionary trusts are often used for managing wealth across generations, though their tax treatment should be considered carefully alongside the new pension rules.
Reviewing pension drawdown strategy
With the new pension IHT rules in mind, less than a year away, some clients may choose to draw down pensions more actively now during their lifetime, using the funds to support gifting, investments or other planning approaches.
Charitable giving
Leaving 10% or more of your net estate to charity may reduce the rate of inheritance tax on the remainder from 40% to 36%, and gifts to charity remain exempt.
With the right plan, you’re on the right path
Wealth planning - Wealth management
Next steps
The 2027 changes to pension funds do not remove the opportunity for effective wealth transfer, but they may change how pensions are considered within estate planning. A review of your estate plan ahead of April 2027 can help ensure your arrangements remain aligned with your circumstances.
Speak with a Brown Shipley Client Advisor about how your wealth plan could evolve in light of these changes.
1 Technical note: Inheritance Tax on pensions - https://www.gov.uk/government/publications/inheritance-tax-on-pensions-technical-note/technical-note-inheritance-tax-on-pensions
Important Information
Information correct as of 24 June 2026.
This document is designed as marketing material. This document has been composed by Brown Shipley & Co Ltd ("Brown Shipley”). Brown Shipley is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales No. 398426. Registered Office: 2 Moorgate, London, EC2R 6AG.
This document is for information purposes only, does not constitute individual (investment or tax) advice and investment decisions must not be based merely on this document. Whenever this document mentions a product, service or advice, it should be considered only as an indication or summary and cannot be seen as complete or fully accurate. All (investment or tax) decisions based on this information are at your own expense and at your own risk. You should (have) assess(ed) whether the product or service is suitable for your situation. Brown Shipley and its employees cannot be held liable for any loss or damage arising out of the use of (any part of) this document.
The contents of this document are based on publicly available information and/or sources which we deem trustworthy. Although reasonable care has been employed to publish data and information as truthfully and correctly as possible, we cannot accept any liability for the contents of this document, as far as it is based on those sources.
Investing involves risks and the value of investments may go up or down. Past performance is no indication of future performance. Currency fluctuations may influence your returns.
The information included is subject to change and Brown Shipley has no obligation after the date of publication of the text to update or amend the information accordingly. Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it.
This is non-independent research, and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
All copyrights and trademarks regarding this document are held by Brown Shipley, unless expressly stated otherwise. You are not allowed to copy, duplicate in any form or redistribute or use in any way the contents of this document, completely or partially, without the prior explicit and written approval of Brown Shipley. Notwithstanding anything herein to the contrary, and except as required to enable compliance with applicable securities law. See the privacy notice on our website for how your personal data is used (https://brownshipley.com/en-gb/privacy-and-cookie-policy).