The Proposed 2027 Pension & Inheritance Tax Reforms Explained

What they could mean for your retirement planning

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📘 Introduction

For decades, UK pensions held a unique advantage in estate planning: unused defined contribution pensions were usually outside your estate for Inheritance Tax (IHT). This made pensions one of the most effective ways to pass wealth to the next generation.

From 6 April 2027, proposed reforms will bring all pensions into the estate for IHT purposes. This guide sets out what’s changing, who is affected, and the strategies you can use to adapt.

⚠️Disclaimer: These reforms are proposed and not yet finalised in legislation.Information is for education purposes only and not financial advice. Rules may change before April 2027.

🔄 What’s Changing?

Before April 2027, unused DC pensions were excluded from estates for IHT. Beneficiaries could inherit pension wealth outside the 40% IHT charge.

From April 2027 under the proposed reforms, all pensions – whether crystallised, in drawdown, or untouched – will count towards your estate. DB scheme lump sum death benefits will also be included.

⚠️ Why It Matters

This is a major shift. High-value estates will see pensions push them over the IHT threshold, potentially creating large tax bills. The old logic of ‘preserve pensions, spend ISAs first’ may no longer hold. For many, pensions could become assets to spend earlier in retirement.

🔗 Interaction with Other Elements

• Nil-Rate Bands: Pensions will now consume your £325,000 NRB and £175,000 RNRB, reducing allowances available for property.
• ISAs vs Pensions: Both will be subject to IHT. ISAs remain free of income tax and CGT during life, pensions are taxed as income.
• Gifting Rules: Lifetime gifting (7-year rule, gifts from income) becomes moreattractive.
  > Update (August 2025): TheTreasury are reviewing gifting rules for the Autumn Budget, which could affect how allowances and exemptions work. Keep abreast of developments at RetirePlan.co.uk.
• Protection Policies: Whole-of-life cover in trust may help meet future IHTliabilities.
• DB Schemes: Survivor pensions are still income-taxable; lump sums may now attract IHT.

📊 Case Studies: Before vs After 2027

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While the single-person example shows the principle, most IHT planning happens at the couple level. The ‘last survivor’ estate is what really counts — and here the difference is even starker.

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🛠️ Practical Strategies

1. Revisit withdrawal order – consider spending pensions earlier.
2. Blend lump sum options – tax-free cash into ISAs for lifetime use.
3. Use gifting allowances – £3k annual, small gifts, regular gifts from income.
4. Consider life cover – whole-of-life policies in trust to cover IHT bills.
5. Charitable giving – leaving 10%+ of estate reduces IHT rate to 36%.

⏳ Timeline

• Now – April 2027: Current rules apply, pensions remain outside estate.
• 6 April 2027: Proposed reforms bring pensions into IHT net.
• Post-2027: Families need to adapt withdrawal and estate strategies.

✨ Key Takeaways

The proposed reforms remove pensions’ IHT shelter. Planning now is essential – especially for estates over £500k (single)or £1m (couple with home). Withdrawal order, gifting, and life cover should all be revisited.

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