Pension IHT Changes in 2027 – Why you must prepare now

An interview with Sam Slack, Financial Adviser

middle aged couple sitting together in the house
Solving the pension problem

Chancellor Rachel Reeves promises “national renewal” despite “uncertain times ahead” as she wrestles to gain control of a challenging economy, battling poor growth, substantial borrowing costs and increased defence needs. 1

As part of this, pension reform is in the spotlight. Recent changes to pension policy mean that pensions will be subject to Inheritance Tax (IHT) from April 2027. It is predicted that 53,000 estates will face new or extra IHT liability between 2027 and 2030. 2

From April 2023 to March 2024, a record £7.5 billion inheritance tax was paid, which is £400 million more than the previous year. This is an increase largely fuelled by house price rises, pushing more people over the tax threshold. 3

Whilst changes to tax rules bring a new challenge for passing on your wealth efficiently, they are a reminder of the importance of planning. Here are some of the key questions we’ve been asked about this.

How does inheritance tax work currently?

You are not charged IHT on anything left to a spouse or civil partner after your death. This isn’t set to change.

Currently, for other inheritances, anything you pass on is not subject to tax on the first £325,000 of the estate. For a married couple who leave a property to a direct descendent, such as a child or grandchild, typically up to £1million can be passed tax free (if the estate is worth less than £2 million).

Anything above your IHT tax allowance is charged at 40%. If you leave at least 10% of the taxable value of your estate to charity, the IHT is reduced to 36%.

Pensions are not currently included when working out the value of your estate. The calculation instead considers aspects such as your age on death:

  • Your pension can be inherited tax-free if you die before the age of 75.
  • Income tax is liable if you are 75 or over, at the beneficiary’s personal income tax rate.

What changes are happening to pension inheritance in 2027?

From April 2027, your taxable estate value will now include your unspent pension funds. However, if your pension is passed to your spouse or civil partner, we expect this to remain tax-free on first death.

There will still be categories related to age of death:

  • If you are under the age of 75, your beneficiaries will not pay income tax on an inherited pension, after IHT has been deducted.
  • If you are 75 or over, income tax will be liable for any beneficiary at their personal income tax rate, after IHT has been deducted.

This means that some pensions could be subject to both IHT and income tax. The Government states that, “It is fair that Inheritance Tax is applied as consistently as possible across similar types of assets, including pensions and savings products.” 4
From age 55, increasing to 57 in April 2028, you can take up to 25% of your pension money without incurring tax. This is known as a tax-free lump sum, and the maximum allowance is usually fixed at £268,275.

What about the IHT tax-free threshold?

The £325,000 threshold for estates being taxed was set to be frozen until 2028, however this has now been extended until 2030, which will result in more estates being affected by IHT.

How do I know if I’ll be affected by this?

We can help you work out the details about how the tax changes could affect your estate, considering growth of assets such as your property or investment portfolios, and any potential financial needs. We make projections into the future, with the frozen thresholds in mind. This is a process of Lifetime Cash Flow Planning that considers the income and capital that might be needed at different points of life.

What’s the easiest way to reduce inheritance tax?

With good financial planning, we can work out your financial needs combined with your goals and help you come up with a robust strategy.

This could include:

  • Making a Will – if you don’t specify how you want your money to be allocated, more might end up incurring tax.
  • Making financial gifts – you can give away up to £3,000 each tax year without it being added to the value of your estate. Larger gifts become fully IHT-exempt after seven years, with tax reducing on a sliding scale from three years.
  • Gifting with ‘normal expenditure out of income’ – if it meets the criteria, this can be immediately tax-exempt. More on this below.
  • Life assurance policies – these can be used to bring some certainty, for example to provide funds needed to pay any IHT due, if a financial gift was given but the benefactor dies before the seven-year 100% tax-exemption period has elapsed.
  • Setting up Trusts – so that money or property sits outside of your estate when you die. However, do note, Trusts are highly complicated, requiring specialist advice, and may incur tax charges at certain points, such as when property leaves the trust.
  • More specialist, higher risk options – such as investing in Business Relief qualifying assets which are IHT-exempt after only two years.

Should I draw down my tax-free lump sum now?

Maybe there is the trip of a lifetime to enjoy, the dream of a second home or gifts to support the next generation. We’d only recommend accessing your lump sum if you have a clear purpose for the funds and have looked at the likely income and capital that you’ll need for a comfortable future, under various scenarios. Your financial adviser can help you with this.

How can ‘normal expenditure out of income’ reduce IHT?

It is possible to make financial gifts and receive immediate tax relief, if you can prove that the gift:

  • formed part of your normal expenditure
  • was made out of income
  • left you with enough income to maintain your normal standard of living.
  • is regular, with the intent to form a ‘pattern of giving’. 5

For example, you could draw a regular income from your pension and gift it in this way, keeping clear documentation to show it meets the criteria.

Should I do anything now?

The first piece of advice is don’t panic! There is time to make changes without rushing the process, but it’s good to start having the conversations. Knowledge is always power, so get to grips with the value of your estate and the likely impact of the pension changes.

If you’re married, a simple action might be to nominate your spouse or civil partner as the beneficiary of your pension, as opposed to your children, by 06 April 2027.
If financial gifting is going to be part of your approach, then it makes sense to do it sooner rather than later, after ensuring any gifts don’t affect your ability to maintain your lifestyle. This will enable the seven-year period to begin reducing.

Holden & Partners has Society of Trust and Estate Practitioners (STEP) affiliated advisers, who can support you at every stage and offer high-quality advice for your estate planning.

1 Spring statement 2025: key points at a glance | Spring statement 2025 | The Guardian
2 153,000 estates face new or extra IHT liability between 2027-30
3 Inheritance threshold UK: how it works – Times Money Mentor
4 Technical consultation – Inheritance Tax on pensions: liability, reporting and payment – GOV.UK
5 IHTM14241 – Lifetime transfers: conditions for normal out of income exemption: normal expenditure – HMRC internal manual – GOV.UK