Experts warn 2027 pension tax changes could drag on inheritance tax savings – what families need to check now
For years, annuities have been one of the most tax-free ways to pass money on to loved ones. But that’s changing — and it could affect far more people than expected.
From 6 April 2027unused pension funds will be included when calculating the value of the estate for inheritance tax. That means some families who thought they were safely under the threshold could suddenly face a tax bill.
What’s new:
From April 2027, unused pension pots will be included in the calculation of inheritance tax – a major change from previous rules where pensions used to remain outside estates.
MoneyMagpie consumer finance expert Jasmine Birtles explains:
“This is one of those changes that sounds technical, but can have a real impact on ordinary families. People who have carefully saved their pension money may not realize that the remaining pot could be heading for inheritance tax. The key is to understand your situation early.”
What is changing?
Currently, most defined benefit pension pots remain outside your estate for inheritance tax purposes.
But from April 2027, unused pension funds and death benefits will be included in the calculation of inheritance tax liability. The standard rate of inheritance tax is 40% in the amount above the allowances available.
Spouses and civil partners can often inherit tax-free, but children and other beneficiaries may face a tax charge depending on the total value of the estate.
MoneyMagpie warning:
This does not mean that all pensions will face a 40% tax liability. It depends on your total estate, who inherits, and what allowances apply – but pensions will no longer be overlooked in estate planning.
Who would be most affected?
- People with large defined benefit pension pots
- Homeowners are already close to the inheritance tax threshold
- Those who plan to leave their pension untouched by inheritance
- Individuals without a spouse or civil partner as the main beneficiary
- Families that pass wealth directly to children or grandchildren
What should you check now?
1. Check your pension value: Go through all the providers – most people have multiple pots.
2. Review the heirs’ forms: Your “statement of wish” is important and may need to be revised.
3. Assess your inheritance: Put property, savings and pensions under the new rules.
4. Understand thresholds: The grant of £325,000 can be increased by property grants.
5. Avoid quick decisions: Quick withdrawals can result in income tax.
Should you start using your pension?
Some retirees may consider using more of their pension during their lifetime rather than leaving it untouched – but this needs careful consideration.
You still need enough money to retire, and withdrawals can cause tax costs.
“The worst thing people can do is panic and start drawing pensions,” said Jasmine Birtles. “A good plan balances tax, income and family needs – not just inheritance.”
Are annuities more popular?
Annuities – which turn pension savings into guaranteed income – see renewed interest as rates improve and tax rules change.
They can provide certainty, but limit flexibility and are often irreversible once established.
• Spend more of your pension during retirement
• Give money carefully (within the rules)
• Consider annual fees for guaranteed income
• Review your will and estate planning
• Seek regulated financial advice if you are unsure
What not to do
- Don’t withdraw large sums of money without checking the tax implications
- Don’t assume your pension is being paid out of a will
- Don’t assume that your children will inherit tax-free
- Ignore old workplace pensions
- Don’t rely on social media “tax hacks”
An important point
This change does not take effect until April 2027but early preparation is key.
For many families, pensions have quietly become an important part of estate planning. That is now changing – and understanding your position can make a big difference in what your loved ones experience.
For more help understanding your retirement income, read our guide to how much you can get in the State Pension, or learn how to trace lost pension pots.
Frequently Asked Questions
Will pensions be subject to inheritance tax?
From April 2027, most unused pension pots will be included in the calculation of inheritance tax, depending on the total value of the assets and beneficiaries.
Will my spouse pay inheritance tax on my pension?
In most cases, transfers from a spouse or common-law partner remain free of inheritance tax.
What is the rate of inheritance tax?
The standard rate is 40% of the property value in addition to the tax-free allowances available.
Should I withdraw my pension to avoid tax?
That’s not the case. Withdrawals can cause income tax and reduce retirement income – seek advice before making decisions.
