For decades, pensions have been a quiet escape route from inheritance tax. That is about to change. From 6 April 2027, most unused defined contribution pensions will count towards your estate. Millions of savers will feel the effect.
This guide explains who is affected and what the new rules mean in practice. It also covers the steps you can take now. Many people speak with a financial advisor Bath residents trust before they act.
Quick Answer
Yes. From 6 April 2027, most unused defined contribution pension pots and death benefits will fall inside your estate for inheritance tax (IHT). They will be taxed at 40% where your total estate exceeds your allowances. Until then, most of these pots sit outside the estate.
Why Is the Government Making This Change?
Pensions were designed to fund retirement. Many families now treat them as a tool for passing on wealth. The Treasury wants to close that gap. The change was announced in the Autumn Budget 2024. It has since been confirmed in law through the Finance Act 2026.
What Counts as a Pension for IHT?
The new rules target most unused defined contribution pots. This includes personal pensions and workplace pots. It also covers drawdown funds left behind at death.
Some benefits fall outside the change. Death in service payments are not caught. Most defined benefit schemes also stay out of scope. Your scheme documents will confirm which rules apply to you.
How Much Tax Could Your Family Pay?
IHT applies at 40% above your nil rate band of £325k. A residence nil rate band of £175k may also apply. You receive it when you leave your home to children or grandchildren. Both allowances are frozen until April 2031.
Here is a simple example. A single person holds £600k in property and savings. They also hold a £300k pension.
| Key Aspects | Before April 2027 | After April 2027 |
| Taxable estate | £600k | £900k |
| Less nil rate band | £325k | £325k |
| Amount taxed | £275k | £575k |
| IHT at 40% | £110k | £230k |
The pension adds £120k to the bill. Larger estates face another risk. The residence nil rate band shrinks once an estate passes £2m. A big pension pot can push you over that line.
The Double Tax Trap
Age matters here. If you die after 75, your beneficiaries may pay twice. IHT is charged first. Income tax follows at their marginal rate on any money they withdraw. The combined burden can reach 67% for additional rate taxpayers.
If you die before 75, the income tax charge usually does not apply. IHT still can.
Who Is Protected?
Some groups keep their shelter. Money left to a UK domiciled spouse or civil partner remains exempt. Charity gifts are exempt too. These routes only defer or redirect the tax. Married couples still face a bill when the second partner dies. Unmarried partners get no spouse exemption at all.
Who Pays and Who Reports?
Personal representatives will usually report the pension value to HMRC. Scheme administrators are expected to pay the tax where requested. This adds paperwork at a hard time for families. Clear records and up-to-date nominations make life easier.
Smart Steps to Consider Now
There is no need to panic. You do have time to review your plan. These ideas often feature in good financial planning in Bath conversations.
Rethink Your Withdrawal Order
Many retirees once spent savings first and left pensions untouched. That order may no longer suit your family. Drawing on pension income earlier could shrink the taxable pot. The right mix depends on your income tax position.
Use Gifts and Exemptions
You can give £3k each tax year without any tax. Regular gifts from surplus income are also exempt. Larger gifts become free of IHT after seven years. Keep detailed records of everything you give.
Consider Life Insurance in Trust
A whole of life policy written in trust can pay out outside your estate. The proceeds can then cover the tax bill. Your heirs would not need to sell property to settle it.
Check Your Beneficiary Nominations
Out-of-date forms cause real problems. Review them after any major life event. Marriage and divorce are the obvious triggers. A new grandchild is another.
Review Your Will and Trusts
Trusts can protect assets and give you control over who benefits. Advice on trusts and taxation sits outside FCA regulation. Take care to choose a qualified firm.
Why Professional Advice Matters
These rules interact with income tax and gifting limits. They also touch your will and your spending plans. One wrong move can cost your family tens of thousands of pounds. A financial adviser in Bath that families recommend will look at the whole picture.
An independent financial adviser in Bath can compare every option without product bias. A skilled financial planner in Bath will also model how long your money needs to last.
How Humboldt Financial Can Help
Humboldt Financial is an FCA-regulated firm. Its reference number is 826457. The advisers cover pension and retirement planning. They also work on tax efficiency and estate planning. The team supports clients with later life drawdown strategies too.
Humboldt holds more than 240 Google reviews with a five-star rating. Clients praise clear explanations and transparent charges. Anyone searching for an IFA Bath can book a no-obligation consultation online. Humboldt advisers meet clients by video. You can also call 020 3031 9187.
Frequently Asked Questions
Will my pension be taxed after I die from April 2027?
Most unused defined contribution pensions will count towards your estate. IHT applies at 40% above your allowances.
Is my pension taxed if I leave it to my spouse?
No. Transfers to a UK-domiciled spouse or civil partner remain exempt. Tax may arise when the second partner dies.
Does the change apply to defined benefit pensions?
Most defined benefit schemes fall outside the new rules. Check your scheme terms for confirmation.
Should I spend my pension before April 2027?
Not without advice. The best strategy depends on your income tax position and your family goals.
How do I find the right professional?
Check the FCA Register to confirm authorisation. Then look for clear fees and strong client reviews.
