National Pension Awareness Week: Why the April 2027 Inheritance Tax changes mean it’s time to review your estate

National Pension Awareness Week runs every September, helping to raise awareness of the importance of pensions and our general financial health for retirement.

This year Pension Awareness Week is particularly significant, as major changes to the inheritance tax (IHT) treatment of pensions are due to take effect from 6 April 2027, potentially altering the way many people approach both retirement and estate planning.

For years, pensions have been one of the most tax-efficient ways to pass wealth to future generations. However, the new rules will mean that many pension funds that currently sit outside an individual’s estate will instead be considered when calculating IHT liabilities.

What Is changing?

Under current rules, most unused defined contribution pension funds and pension death benefits are generally outside the scope of IHT. This has made pensions an attractive estate planning tool, allowing many people to preserve pension wealth while spending other assets first during retirement.

From 6 April 2027, most unused pension funds and pension death benefits will be included within the value of a deceased person’s estate for IHT purposes.  For families who may previously have been below the IHT threshold, adding pension assets into the calculation could potentially bring them into scope for tax.

What’s the impact?

Inheritance tax is charged at 40% on the value of an estate above available allowances and exemptions. While many individuals benefit from the nil-rate band and potentially the residence nil-rate band, the inclusion of pension wealth could significantly increase the taxable value of an estate.

For example, someone with a family home, investments and a sizeable pension pot may have previously viewed their pension as being outside their estate. After April 2027, those pension savings may form part of the overall IHT calculation, potentially resulting in a larger tax bill for beneficiaries.

The impact is likely to be felt most keenly by higher-net-worth individuals, but many middle-income families could also be affected due to rising property values and larger workplace pension balances accumulated through auto-enrolment.

Will anything stay the same?

While the changes are significant, not everything is changing.

Certain exemptions will continue to apply. In particular, pension benefits passing to a surviving spouse or civil partner will generally remain exempt from IHT, and registered pension scheme death-in-service benefits are expected to remain outside the new rules.

In addition, the existing income tax rules for inherited pensions are largely unchanged, so the tax treatment will still depend on whether the pension holder dies before or after age 75.

What should families consider?

The approaching deadline does not mean pension holders should rush into making changes. In fact, withdrawing large amounts from a pension without careful planning can create other tax consequences and may not be in the holder or their family’s best interests.

However, National Pension Awareness Week is an excellent time to review your wider financial plan and consider questions such as:

• Is your pension likely to form a significant part of your estate?
• Have your beneficiary nominations been updated?
• Are your retirement income and estate planning strategies still aligned?
• Would gifting strategies or other planning opportunities be appropriate?
• Have you sought professional advice on the potential impact of the changes?

With pensions no longer enjoying the same inheritance tax advantages, the order in which retirement assets are accessed may need to be reconsidered.

What are the first steps to take?

National Pension Awareness Week reminds us that pensions are about much more than retirement income. They are often one of the largest assets people own and can play a crucial role in family wealth planning.

The introduction of IHT on most unused pension funds from April 2027 represents one of the most significant pension planning changes in recent years. While not everyone will be affected, those with substantial pension savings should review their arrangements sooner rather than later.

By understanding the rules and seeking timely advice, individuals can make informed decisions that support both their retirement goals and their wishes for future generations. National Pension Awareness Week provides the ideal reminder to start that conversation today.

Our specialist tax and private client solicitors can help.  For a no-obligation discussion please contact Bethan Chant in our Marlow office at bethan.chant@theburnsidepartnership.com