For years, pensions were the golden goose of estate planning — outside of Inheritance Tax (IHT), flexible, and easy to pass on. But the landscape is shifting, and it’s an area where myths and half-truths abound.
Where we are now (pre-2027):
- Before age 75: If you die before 75, most pension funds can be passed to beneficiaries tax-free.
- After age 75: Beneficiaries pay income tax at their marginal rate when they draw from the fund. But crucially, the pension pot itself has generally been outside IHT.
- Nominations matter: If you don’t nominate who should inherit, the scheme trustees decide. (Not always who you’d have chosen.)
Where we’re heading (April 2027):
- Draft legislation says most pensions will fall into the IHT net — meaning the value of your pension could be taxed at 40%.
- Importantly: the rules say the pension scheme itself can pay its share of the IHT bill directly. That helps with cashflow but doesn’t reduce the amount due. A £1m pension could still face a £400,000 IHT hit before beneficiaries see a penny.
- Different pensions may be treated differently. Defined contribution schemes (pots you build up) are likely to be caught. Some defined benefit (final salary) schemes may be treated differently, but the detail isn’t finalised.
When is a pension counted for IHT?
- Generally not counted (for now): most untouched defined contribution pensions with nominations in place.
- Already within scope: drawdown funds if transfers are made in ill-health, or where HMRC argues you retained control.
- From 2027: most uncrystallised defined contribution pensions are expected to be pulled into IHT.
The Halloween tale…
Mr. Smith, aged 76, has a £1m pension he’s never touched (he lives off other income). He assumes it’s the family nest egg. Sadly, he passes away.
Today’s rules:
The pension sits outside IHT. His children inherit the pot, taxable as income when they draw it. If they’re higher-rate taxpayers, they might pay 40–45% income tax as they withdraw — still painful, but at least spread out.
2027 rules:
The £1m is included in his estate for IHT. That’s a potential £400,000 IHT bill, which the pension scheme pays to HMRC before anyone inherits. The children still pay income tax when they draw the money. Double hit: IHT and income tax.
What this means for you:
- The legislation isn’t final yet — but planning ahead is essential.
- Pensions may no longer be the “last thing you spend.” In some cases, drawing on pensions earlier could save the family from a double tax charge.
- Updating nominations is critical. We’ve seen horror stories where an ex-spouse inherits because the nomination was never changed.
Practical tip: Review your pensions now. Understand whether they’re likely to fall within IHT from 2027, and how that interacts with your wider estate planning.
Call to action: Talk to us about the tax side of pensions and death benefits — we can flag the likely inheritance tax position, so you and your financial adviser can plan with eyes wide open.
Back to You are not Immortal – a practical guide to a delicate topic – IHT
