When this change was first announced at the October 2024 Budget, it was a proposal. It’s since received Royal Assent as part of the Finance Act 2026, which means what happens from 6 April 2027 is now settled rather than something that might still shift in the next Budget. From that date, most unused pension funds and death benefits will count as part of your estate for Inheritance Tax purposes – a fairly fundamental change, given pensions have generally sat outside the taxable estate since the current rules were introduced back in 2015.
What this actually means
The Government estimates the change will affect around 8% of estates each year, mainly those where pension wealth is substantial or where other assets already push an estate close to or over the Inheritance Tax threshold. The nil-rate band (£325,000) and residence nil-rate band (up to £175,000) were already frozen until April 2030, and the Autumn Budget 2025 extended that freeze by a further year, to April 2031 – so more estates are already drifting toward the threshold regardless of this change, and will keep doing so for longer than originally planned. Pensions being added into the calculation from 2027 will push some over it who wouldn’t otherwise have been.
What’s been confirmed since the original announcement
A few practical details that weren’t settled at first have since been confirmed. Responsibility for reporting and paying any Inheritance Tax due on pension death benefits will sit with personal representatives – typically executors – rather than with the pension scheme administrator, though administrators will be able to pay HMRC directly through a new Pensions Direct Payment Scheme once a beneficiary formally requests it. The existing spousal and civil partner exemption remains fully intact, so pensions passing to a spouse or civil partner stay outside Inheritance Tax as they do now. Death-in-service benefits, dependants’ scheme pensions and joint life annuities are also excluded from the new charge.
How people are already responding
A survey by interactive investor, taken while this was still a proposal, found that 54% of UK adults planned to adjust their retirement or estate plans in response – 19% said they’d withdraw more from their pension to gift to loved ones during their lifetime, 8% said they’d consider reducing pension contributions, and 6% were weighing early retirement. Those figures were gathered before the change became law, so if anything they likely understate how many people are now factoring it into their planning with the detail confirmed.
Worth thinking through, not reacting to
It’s understandable to want to act on this, but withdrawing pension money faster than you otherwise would isn’t automatically the right response. Pensions still carry valuable tax relief and tax-efficient growth that a General Investment Account or even an ISA doesn’t fully replicate, and withdrawing more than you need can simply swap a future Inheritance Tax liability for an Income Tax bill today. There are two specific tools worth understanding properly before reaching for either, though – drawing your tax-free lump sum, and using a trust.
Should you draw your tax-free lump sum sooner?
Most pensions allow up to 25% to be taken as a tax-free lump sum, capped at £268,275 for most people under current allowances. It’s worth being clear about what drawing it actually achieves under today’s rules versus 2027’s. Right now, an unused pension generally sits outside your estate, while cash sitting in a bank account doesn’t – so simply withdrawing the lump sum and leaving it there as cash can move money from a tax-advantaged position into a taxable one, which is the opposite of what most people withdrawing it early are hoping to achieve. Where drawing it earlier tends to make sense is when the money is then put to work – gifted to children or grandchildren under the seven-year rule, used to fund a pension for a spouse who has less of their own, or spent on things you’d have funded from other savings anyway, freeing those other savings up for gifting instead. From April 2027, some of this calculation shifts, since the pension itself will no longer automatically sit outside the estate – but the underlying principle doesn’t change: taking money out only helps your Inheritance Tax position if it then actually leaves your estate too, whether through spending, gifting, or a trust.
Trusts: giving money away while keeping some structure around it
A trust can be a useful way to pass on wealth from a pension withdrawal while retaining more structure than an outright gift – useful where you want money set aside for grandchildren’s education, for example, rather than handed directly to adult children to use however they choose. The detail matters here: gifts into most trusts above your available nil-rate band trigger an immediate 20% charge, with further charges potentially arising every ten years and when money leaves the trust, so the numbers need working through properly rather than assumed. Trusts are also commonly used the other way round – not to hold gifted pension money, but to hold a life insurance policy that pays out to cover whatever Inheritance Tax bill your pension and estate eventually create, without the payout itself adding to the bill. We’ve set out how that works in more detail in our piece on life insurance for Inheritance Tax. Either way, trust planning is one of the few areas here where getting proper advice before acting matters more than usual – the rules are detailed, and unwinding a badly structured trust is far harder than setting one up correctly the first time.
Let’s work out what this actually means for you
We work with clients across Poole, Bournemouth and the wider Dorset area to factor changes like this into a proper financial plan, rather than reacting to headlines in isolation. If you’d like to understand how this affects your own estate, get in touch and we’re happy to have a no-obligation conversation.
Find out more about our Inheritance Tax planning services here
This article is for general information only and does not constitute financial or tax advice, which should be based on your individual circumstances. The information is aimed at retail clients only. All information is correct at the time of writing (September 2026) and is subject to change in the future.
The value of your pension and investments (and any income from them) can go down as well as up and you may not get back the full amount invested. Tax treatment depends on individual circumstances and may change in the future.
The Financial Conduct Authority does not regulate Inheritance Tax planning, trusts or will writing.