pension book
August 2, 2025

4.3 Pensions and Estate Planning

Pensions are changing from 2027. This chapter explains how death benefits work now, what’s changing, and how to pass on pension wealth tax-efficiently

Pensions and Your Legacy: Navigating the Shifting Sands of Estate Planning

For decades, pensions have been a cornerstone of retirement planning — not just for providing income in later life, but also as a highly tax-efficient way to pass wealth to loved ones.

However, from April 2027, significant changes will fundamentally alter how unused pension funds are treated for Inheritance Tax (IHT).

How Pension Death Benefits Currently Work

Pensions have been popular in estate planning because, in most cases, they sit outside your estate for IHT. That means:

  • Your pension pot isn’t included when calculating IHT
  • Beneficiaries may avoid the 40% tax hit
  • The structure depends on age at death and how benefits are paid

Table: Current Rules for Pension Death Benefits

T4.3.1 – Pre-Apr 27 rules for Pension Death Benefits
FactorOutcome
Death under age 75Beneficiaries receive funds tax-free (within LSDBA)
Death at or after 75Beneficiaries taxed at their income tax rate; trusts taxed at 45%
Funds paid via drawdownAllows ongoing flexible withdrawals by beneficiary
Nomination form completedProvider usually follows your wishes (not covered by Will)

Why It Was So Powerful

If you had other income to live on, leaving the pension untouched allowed it to:

  • Grow free from capital gains tax
  • Pass IHT-free to your beneficiaries
  • Support intergenerational wealth planning

The Seismic Shift in 2027

The Autumn Budget 2024 announced that from 6 April 2027, unused pension funds and death benefits will become subject to IHT.

Table: Summary of 2027 Pension IHT Changes

T4.3.2 – Summary of 2027 Pension IHT Changes
ChangeImpact
Pensions included in estateUnused DC funds will count toward IHT threshold
Drawdown not exemptResidual drawdown funds included in IHT scope
Double taxation riskFunds may be taxed for both IHT and income tax
Administrator deducts IHTScheme deducts tax before paying beneficiaries

Exceptions will still apply for:

  • Transfers to spouses or civil partners
  • DB dependants’ pensions and joint annuity payments
  • Charity lump sum death benefits

Post-2027: Planning for Tax-Efficient Inheritance

You still have options — but they now require active planning.

Actions to Consider:

  • Update your Expression of Wish forms
  • Review the ‘pensions last’ strategy — it may no longer be optimal
  • Draw down earlier if in a lower tax bracket
  • Take and gift tax-free cash, but be mindful of 7-year IHT rules
  • Prioritise spousal exemption to defer IHT
  • Coordinate with Will and trust planning

Final Thought: Get Professional Advice

The 2027 IHT changes are complex, and everyone’s circumstances are different.

If you have substantial pension assets, consider working with a financial planner to:

  • Assess your pensions and wider estate
  • Model scenarios pre- and post-2027
  • Decide how much to draw and when
  • Ensure your wishes are carried out tax-efficiently
⏳ Don’t wait until 2027 — decisions you make now can reduce tax and increase what you pass on.

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