From April 2027, unused defined contribution pension pots may count within the value of your estate for inheritance tax. We write this guide to make that change simple and practical.
We are addressing homeowners and retirees who have saved well and want to protect what their family receives.
In clear language, we explain why a pension can move from a background asset to a central concern. It is not just about who inherits. Timing, tax and the order you draw from assets now matter.
This is practical help. We set out what to check, what to model and what to discuss with an adviser before the rules change. We use real numbers, like the £500,000 tipping point, to help you sense-check your own position.
Rules can change and every situation differs. Treat this as guidance to ask the right questions and take sensible next steps to protect family wealth and the future you want.
Key Takeaways
- From April 2027, unused pension pots may affect inheritance tax calculations.
- Think beyond who gets the pot — consider timing and tax order.
- Homeowners and retirees should model scenarios, using figures like £500,000.
- Discuss options with a qualified financial adviser before changes begin.
- Rules may shift; use this guide to ask the right questions for your family.
What’s changing in April 2027 and why it matters for defined contribution pensions
A single government change can turn a tucked-away pot into an IHT consideration.
From 6 April 2027, unused defined savings are expected to be added to your estate for inheritance tax. This marks a clear shift from the past, when many pension pots sat outside tax calculations.
Unused pension pots added from 6 April 2027
The proposal brings unused pension funds into the IHT net. Unused generally means funds left untouched at death. That matters whether someone dies before or after using the savings.
Who is most exposed and why £500,000 matters
Homeowners who hold a healthy pension pot plus property and other savings are most at risk. The £500,000 figure appears because it can consume the typical Nil-Rate Band plus the Residence Nil-Rate Band.
| Item | Typical value | How it affects IHT |
|---|---|---|
| Nil-Rate Band | £325,000 | Tax-free allowance |
| Residence Nil-Rate Band | £175,000 | Applies when passing a home |
| Combined threshold | £500,000 | Point where IHT can arise |
Action tip: model your numbers early. Small choices on nominations and withdrawals can make a big difference.
How to assess your inheritance tax exposure using today’s allowances
Start by adding up what you own today so you can see where tax could bite tomorrow.
What the Nil-Rate Band and the residence allowance mean
The Nil-Rate Band gives the first £325,000 free of tax.
The Residence Nil-Rate Band adds up to £175,000 when you leave a qualifying home to direct descendants.
Together they can shield about £500,000 for one person.
A clear checklist to total your holdings
- Property market value.
- Savings and investments.
- Any unused pension value (from April 2027 this may count).
- Other belongings that form part of the estate.
Worked example and couples’ transfer rules
Imagine £500,000 in a pension, a £400,000 home and £100,000 savings — total £1,000,000.
After the £500,000 allowance for an individual, £500,000 is taxable. At a 40% IHT rate that is £200,000 of liability.
Couples can transfer unused allowances. This can nearly double protection — often the biggest bill shows after the second death.
For practical next steps, see our note on the nil-rate band allowance.
Why large pension pots can face a double tax hit after death
A single pot may attract tax at the estate level and again when beneficiaries withdraw. That double effect can surprise families and cut the cash available to loved ones.
Inheritance tax on value above allowances
When an unused pot is added to your overall total, inheritance tax may apply to the amount above allowances. The result is an immediate charge on the sum at death.
Income tax on withdrawals after age 75
If death happens after age 75, beneficiaries often face income tax when they take money out. The tax sits at each person’s marginal rate and can be high for adult children.
How combined taxes reduce what beneficiaries receive
The two taxes stack. A £500,000 example may first face 40% IHT, then further income tax as funds are drawn. That leaves much less than the headline sum.
- One tax at the estate level (iht) and one when money is taken.
- Age 75 is the key threshold for income treatment.
- Who draws the money matters — higher-rate payers lose more.
| Stage | Illustration | Effect on pot |
|---|---|---|
| Initial pot | £500,000 | Starting value |
| After inheritance tax (40%) | £200,000 | Tax paid; £300,000 remains |
| After beneficiary income tax (example 20%) | £60,000 | Further tax when withdrawn |
Understanding the double hit helps us decide nominations and withdrawal timing so beneficiaries get more, not less.
estate planning for large defined contribution pensions uk: practical steps to take now
Simple actions now can change how much your family actually receives later.
We set out five practical moves you can make this month. Each is short to complete. Each gives you more control over payments and who benefits.
Check and update nominations
Find your expression of wish. Confirm it names the right beneficiaries and reflects your current wishes.
Clear nominations speed payments and help trustees decide. They do not always guarantee outcomes, but they matter.
Spouse, partner and children — how treatment differs
Spouses and civil partners often get different tax treatment from adult children. That difference can matter once pensions count in IHT.
Use or preserve your pension — a simple decision framework
Think about using some pension funds in retirement rather than keeping everything untouched. Blending withdrawals with other assets can lower future bills.
Gifting, withdrawals and the seven‑year rule
Small gifts over time reduce the taxable total. Remember the seven‑year taper for lifetime gifts.
When to seek professional advice
We recommend an adviser if you have multiple pots, complex family arrangements, or plan large gifts. Take these prompts to your financial adviser:
- Who are the beneficiaries?
- What is the likely IHT bill under the 2027 rules?
- Which withdrawal pattern protects retirement income?
| Action | Why | Time to do |
|---|---|---|
| Update expression of wish | Reflects current beneficiaries | 10–30 minutes |
| Model withdrawals | Balances income and taxable total | 1–2 hours |
| Discuss gifts with adviser | Avoid unintended tax consequences | One meeting |
Tools and strategies to reduce inheritance tax liability without derailing retirement
There are practical tools that let you protect family cash without cutting your retirement income.
Whole-of-life insurance written in trust
Whole-of-life cover can provide a lump sum to meet an inheritance tax bill. Writing the policy in trust helps keep the payout outside your taxable total.
This approach suits families who are asset-rich but cash-poor. It stops heirs having to sell property or investments quickly to meet a bill.
Repositioning wealth and tax-efficient wrappers
Another route is to take some pension income in retirement and move proceeds into tax-efficient wrappers such as ISAs. That can lower future exposure while keeping your income steady.
- Draw modestly now to reduce unused pot value later.
- Use ISAs or other wrappers to shelter growth from future taxes.
When trusts or complex structures may help
Complex trust solutions exist, but they are not DIY. Seek professional advice and an experienced adviser before acting.
Gather these before a meeting: policy details, pension valuations, property value and current income.
| Tool | Who it suits | Main trade-off |
|---|---|---|
| Whole-of-life in trust | Asset-rich, cash-poor families | Insurance cost vs certainty of cash |
| Draw and reposition | Retirees needing steady income | Less pot later but lower future liability |
| Trust structures | Complex families, business owners | Higher cost and complexity; needs advice |
For local guidance on how these choices affect an IHT bill, see our inheritance tax guidance in Pilning.
Special case: business assets held inside SIPPs and SASSs under the draft IHT rules
When a pension scheme owns business assets, the draft rules make reliefs unreliable. The government has said Business Relief and Agricultural Relief will not apply to assets held inside a scheme trustee.
Why reliefs are disapplied
The technical point is simple. Trustees, not the trading business, own the asset. So the asset is not used in the trustees’ trade and BR/AR is disapplied. That change directly affects tax outcomes and succession cases.
Real-world consequence
If an IHT bill lands and the main holding is an illiquid building, beneficiaries may face pressure to sell to raise cash. That can break a family succession plan.
Unwind options and practical checks
- Buy back at full market value to avoid unauthorised payments.
- Get an independent valuation. Confirm future ownership and SDLT exposure.
- Model potential income tax and how lump sums or payments will be treated.
“Sequence and advice matter: the right move depends on the business, the trust rules and family aims.”
| Check | Why | Next step |
|---|---|---|
| Valuation | Sets buyback price | Independent survey |
| Ownership | Who holds title | Confirm legal deed |
| Tax tests | SDLT & income tax risk | Tax modelling with advice |
These are technical and sensitive cases. We recommend early professional advice and careful sequencing. For the government’s technical consultation see the technical consultation.
Conclusion
As April 2027 approaches, it’s sensible to check how a pension pot could change your tax picture. The single big point is clear: unused pension savings may join the rest of your taxable estate.
Work through this order: add up values, apply today’s allowances and model the likely iht position. Then layer on the extra tax risk that can affect death benefits and beneficiary income tax.
Quick self-check: the £500,000 tipping point is a useful guide, but your circumstances will differ.
Update nominations, confirm beneficiaries, consider sensible withdrawals and options such as whole‑of‑life cover in trust. If your SIPP or SASS holds business assets, review it now.
Small, timely choices protect what your loved ones inherit. If you want local support, see our note on inheritance tax planning in Great Chew or contact one of our offices across the country.