The Government’s planned inheritance tax (IHT) changes are about to make pensions a much bigger part of the estate planning conversation.
From April 2027, unused pension pots will start being counted as part of a person’s taxable estate. This is a major shift that could increase inheritance tax bills for thousands of families. Until now, pensions have typically been outside the IHT net, meaning they could be passed on without any tax charge.
That advantage is ending.
Clients with significant pension savings should start thinking now about how best to respond.
What’s changing?
Under the new rules, any unused pension funds and death benefits will generally be treated as part of a person’s estate for IHT purposes.In practical terms, that means if someone dies with a large pension pot that hasn’t been drawn down, its value could push their estate over the £325,000 nil-rate band (or £500,000 including the resident nil rate band allowance if applicable) — triggering a 40% tax charge on the excess.
This move will end one of the most valuable estate planning advantages of pensions and could particularly affect those who have intentionally left pension savings untouched for later life or to pass on to the next generation.
A charitable solution?
There is, however, a silver lining and it comes in the form of charitable giving. By nominating part of a pension to a registered charity, individuals may be able to reduce the taxable value of their estate. As charitable gifts are exempt from IHT, the portion of the pension directed to charity would not be included when calculating the total estate value.
It’s a strategy that combines generosity with smart financial planning. It’s a way to support causes that matter to you while reducing the eventual tax burden on loved ones.
Morven Millar, Director of Gresham Wealth Management, explains:
“The 2027 changes will make pension nominations more important than ever. For some clients, directing part of their pension to charity can be both tax-efficient and personally meaningful. It’s a chance to shape the kind of legacy they want to leave.”
A question of timing and planning
The reforms don’t take effect until 6 April 2027 (subject to legislation and final guidance) but forward-thinking clients should begin reviewing their plans now. Pension scheme nomination forms, trust structures, and wills should all be checked to ensure they align with your overall wishes.
Because pensions are technically held under trust, the scheme’s administrators usually have discretion over how death benefits are paid. That’s why it’s so important to ensure nominations are clear and up-to-date.
Other options worth discussing with our team include:
- Drawing down more of the pension during retirement, to reduce the unused balance.
- Balancing withdrawals from ISAs, investments, and pensions in a tax-efficient way.
- Considering charitable gifts that qualify for IHT relief (for example, if 10% or more of the estate is left to charity, the IHT rate on the remainder can fall from 40% to 36%).
Act early, plan smart
Although 2027 may feel distant, estate planning is most effective when done early. Reviewing things now, under calm and informed conditions rather than in response to last-minute tax changes is more proactive.
By reviewing pension nominations, charitable intentions and estate structures now with our team, our clients can protect their families, support meaningful causes and ensure that less of their hard-earned wealth ends up in the taxman’s hands. As the new IHT rules approach, one thing is clear: legacy planning and financial planning are becoming inseparable.