For wealthy families, pensions have long been one of the most tax-efficient ways to pass on wealth, because assets typically sit outside your estate for Inheritance Tax (IHT) purposes.
But this is set to change.
Pensions will become subject to Inheritance Tax
From 6 April 2027, unused pension funds and death benefits will be included in your estate when you die.
This means pension savings may become subject to IHT at a rate of 40% if your estate exceeds the nil-rate band – £325,000 (in 2026/27).
Benefits paid to a spouse or civil partner will still be exempt from IHT.
However, depending on how they access the funds, some beneficiaries receiving pension savings may also be subject to Income Tax.
The true cost could be higher than you expect
The combination of IHT and Income Tax could lead beneficiaries to face far higher tax burdens in future.
For example, depending on the Income Tax bracket of the beneficiary, a taxable pension fund of £100,000 could incur an effective tax rate between 52% and 67% on death after age 75.
The table below shows how IHT and Income Tax could combine to significantly increase the effective tax rate on inherited assets – particularly where income is taxed at higher or additional rates.
| Taxable pension fund | IHT rate | After IHT | Income Tax rate | Final amount received | Effective tax rate |
| £100,000 | 40% | £60,000 | 20% | £48,000 | 52% |
| £100,000 | 40% | £60,000 | 40% | £36,000 | 64% |
| £100,000 | 40% | £60,000 | 45% | £33,000 | 67% |
All this to say that the new IHT rules could change how pensions fit into your estate plan.
How this may affect your current strategy
Pensions still offer valuable benefits, including tax-efficient growth and flexible income.
However, if your pension plays a part in your estate plan, you may need to rethink:
- When you draw from your pension
- How you balance your pension savings with other assets
- How and when you pass wealth to your family.
Read more: 5 generous options for giving while living to reduce Inheritance Tax on your estate
Depending on your circumstances, you might consider:
- Using pension income more actively rather than preserving it indefinitely
- Gifting during your lifetime, including making use of exemptions such as gifts from surplus income
- Rebalancing your assets to improve overall tax efficiency
- Reviewing beneficiary nominations to ensure they still align with your wishes.
The right approach will depend on your broader financial plan, and potentially the tax position of your beneficiaries.
Read more: Is your family prepared for the ‘great wealth transfer’?
Now may be a good time to revisit your estate plan
The changes won’t take effect until April 2027, so if your estate plan relies heavily on your pension, now could be the right time to revisit it.
The sooner you take steps to address any changes you need to make, the more time and choices you’ll have to protect your estate and your beneficiaries from an unwelcome IHT bill.
It’s also worth noting that some of the finer details are still subject to consultation, so the rules may still evolve over the coming months.
For example, Baroness Ros Altmann has been vocal about her concerns surrounding the planned changes, warning that imposing IHT on pensions could put people off saving for their long-term futures and that the policy could “damage the future of pensions in this country”. [1]
She’s also shared concerns that instead of closing a loophole used by wealthy families, the proposed changes could harm ordinary families.
Altmann argues that a flat-rate levy on unused pensions would be a simpler way to reform the system. She is campaigning for a 15% flat-rate charge that would apply to all pensions, payable on death regardless of an estate’s IHT position. [2]
Speak to your Titan Wealth Planner today
Working with a financial planner can help you understand all your options and write an estate plan that works for you and your beneficiaries.
Your Titan Wealth Planner can help you:
- Assess how the new rules could affect your estate
- Identify opportunities to reduce unnecessary tax
- Build a strategy that balances your lifestyle needs with your long-term goals and legacy wishes.
We’re here to help ensure more of your wealth ends up with the people you care about.
To find out more about how we can help you, email [email protected] or call us on 0800 048 0150.
Please note
The information contained in this article is based on the opinion of Titan Wealth Planning and does not constitute financial advice or a recommendation for any investment or retirement strategy.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning.
