Pension IHT 2027: What Every Pension Holder Needs to Know

For decades, pensions have been one of the most tax-efficient ways to pass wealth to the next generation. That is about to change.

From 6 April 2027, unused pension funds will be brought within the scope of Inheritance Tax (IHT) for the first time. For many families across Scotland and the rest of the UK, this represents one of the most significant shifts in retirement and estate planning in a generation.

If you have a pension — and particularly if you have built up a substantial pot — understanding this change and taking action before the deadline could make a meaningful difference to what you leave behind.

What is changing?

Currently, defined contribution pension funds sit outside your estate for IHT purposes. This means that on death, any unused pension can be passed to your beneficiaries free of Inheritance Tax. It has made pensions an attractive vehicle not just for retirement income, but for intergenerational wealth transfer.

From April 2027, that exemption ends. Unused pension funds will be included in your taxable estate and subject to IHT at the standard rate of 40% above the nil-rate band threshold.

The change applies to defined contribution pensions — the type most commonly held through workplace and personal pension schemes. It does not affect defined benefit (final salary) pensions in the same way.

Who is most affected?

The change will have the greatest impact on:

• Pension holders who have other assets to live on and have been deliberately preserving their pension as a tax-efficient legacy vehicle
• Higher-value estates where the pension pot, combined with property and other assets, pushes the total estate above the nil-rate band
• Those who have not yet drawn down their pension — particularly people in their 60s and 70s who have deferred accessing their pension

If your estate is already above the IHT threshold — currently £325,000 for individuals, or up to £1 million for married couples using all available allowances — the addition of your pension to the taxable estate could significantly increase the tax liability your family faces.

Why the deadline matters

The April 2027 deadline is not just a date to note in the diary. It is a planning horizon.

Certain strategies — such as gifting, restructuring drawdown, or using pension funds to make gifts that fall outside the estate — take time to implement effectively. The seven-year rule for potentially exempt transfers means that gifts made today could be outside your estate by 2033. But gifts made in 2027 or later will not achieve the same result until 2034.

In short: the earlier you act, the more options you have.

What can you do?

There is no single answer — the right approach depends on your individual circumstances, the size of your estate, your income needs in retirement, and your wishes for your family. But some of the strategies worth exploring include:

• Reviewing your drawdown strategy — it may now make more sense to draw from your pension earlier and use other assets for legacy purposes
• Making use of gifting allowances — annual gift exemptions and potentially exempt transfers can reduce the taxable estate over time
• Considering life insurance written in trust — to cover the IHT liability without reducing the inheritance itself
• Reviewing your expression of wishes — ensuring your pension nomination is up to date and aligned with your wider estate plan

Our IHT Planning calculators can help you model the potential impact on your estate and explore different scenarios.

SBC Financial is authorised and regulated by the Financial Conduct Authority (FCA ref: 997666). The value of investments can fall as well as rise. Tax treatment depends on individual circumstances and may be subject to change. This article is for information purposes only and does not constitute personal financial advice.