For decades, the pension fund has been one of the most powerful tools in the professional advisers armoury. Sitting outside the estate for Inheritance Tax (IHT) purposes, an undrawn pension pot could pass to beneficiaries free of the 40% charge that applies to most other assets — a fact that shaped countless Will strategies, financial plans and succession conversations. That position is about to change fundamentally.
From 6 April 2027, most unused pension funds and death benefits will be brought within the scope of Inheritance Tax. Announced in the October 2024 Budget and confirmed in the Finance (No.2) Bill 2025–26, this is arguably the most significant shift in estate planning strategy in a generation. For professional advisers — whether you are an IFA, mortgage adviser, accountant or estate planner — the implications are far-reaching, and the window for proactive planning is narrowing.
What Is Actually Changing?
Under the current rules, most pension schemes are written under trust, with the scheme administrator or trustees retaining discretion over who receives death benefits. Because the member never had a fixed entitlement to those funds, they have generally fallen outside the estate for IHT purposes. This is the mechanism that has made pensions such an effective intergenerational wealth transfer vehicle.
From April 2027, that position is reversed. The gross value of most unused pension funds immediately before death will be treated as part of the member's estate for IHT purposes, regardless of whether the scheme operates on a discretionary basis. The government has been explicit in its rationale: pensions were designed to fund retirement, not to serve as an IHT-free inheritance vehicle.
The key exemptions that will be maintained are worth noting. Death in service benefits payable from registered pension schemes will remain outside the scope of IHT. The existing spousal and civil partner exemption will be preserved, meaning pension funds passing to a surviving spouse or civil partner who is a long-term UK resident will not attract an IHT charge. Gifts to registered charities from pension funds on death will also remain exempt.
The scale of the impact is significant. HMRC estimates that of approximately 213,000 estates with inheritable pension wealth in 2027/28, around 10,500 estates will face an IHT liability where previously they would have paid none, and approximately 38,500 estates will pay more IHT than they would have done previously.[1] The average IHT liability is expected to increase by approximately £34,000 for affected estates when pension assets are included.[2]
The Double Taxation Risk
One of the most pressing concerns for advisers is the potential for double taxation on inherited pension wealth. For clients who die over the age of 75, beneficiaries face not only the 40% IHT charge on the pension value, but also Income Tax at their marginal rate — potentially up to 45% — when they draw down the inherited pension. The combined effective tax rate in such cases can reach 64% to 67%, or even higher for larger estates.[1]
This creates a complete reversal of the conventional wisdom that has guided decumulation planning for years. Previously, the advice was almost universally to "spend the pension last" — to draw down ISAs, savings and other assets first, preserving the pension's IHT-free status for as long as possible. For many clients over 75 with estates likely to be subject to IHT, the optimal strategy may now be to draw down the pension first, accepting the Income Tax charge in preference to the combined double tax burden that would otherwise fall on beneficiaries.
This is a nuanced calculation that depends on individual circumstances, tax brackets and family structures — and it underscores why joined-up advice between the IFA, accountant and estate planner has never been more important.
The Impact on Will Drafting and Pension Nominations For estate planners and Will writers, the 2027 changes fundamentally alter the relationship between a client's Will and their pension nominations. These two documents have historically operated on parallel but largely separate tracks. A client might leave their main estate to their spouse through their Will while nominating their pension directly to their children or grandchildren — a strategy designed to utilise the IHT exemption on the pension while preserving the spousal exemption on the free estate. From April 2027, this approach will no longer deliver the same result.
The pension nomination and the Will must now be considered as part of a single, integrated estate plan. If a pension is nominated to non-exempt beneficiaries such as children, it will consume part of the available Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB), potentially pushing the free estate into a taxable position or reducing the amount available to pass to other beneficiaries. Conversely, nominating the pension to a surviving spouse defers the IHT charge to the second death — which may be appropriate in many cases, but must be balanced against the survivor's own estate position and the potential for further asset growth.
There is also the RNRB tapering issue to consider. Where the inclusion of pension values pushes the total estate above £2 million, the RNRB begins to be withdrawn at £1 for every £2 over the threshold. For clients who were previously comfortably within the RNRB, the addition of a substantial pension pot to their taxable estate could erode this relief significantly.
Expression of Wish forms — the documents through which a pension member indicates their preferred beneficiaries to the scheme administrator — must be reviewed urgently. Many clients have not updated these forms for years, and some have never completed one at all. An outdated or absent Expression of Wish form could result in pension benefits being distributed in a way that conflicts with the client's overall estate plan, creates unnecessary IHT exposure, or prevents beneficiaries from accessing the pension through drawdown rather than as a lump sum.
Lasting Powers of Attorney: A New Strategic Dimension
The implications of the 2027 changes extend beyond death planning into the realm of lifetime management — and this is where Lasting Powers of Attorney (LPAs) take on a new strategic importance.
A Property and Financial Affairs LPA grants an attorney the power to manage a client's financial affairs if they lose mental capacity. In the context of the 2027 pension changes, attorneys may face decisions about whether to draw down pension funds during the client's lifetime as part of an IHT mitigation strategy if the Court of Protection will allow for this. This is particularly relevant for clients over 75, where the "spend pension first" approach may now be appropriate — but where the client may lack the capacity to make that decision themselves.
Attorneys must understand the new landscape. A well-drafted LPA should provide sufficient flexibility for attorneys to make strategic financial decisions, and clients should consider providing clear guidance — through a letter of wishes or within the LPA itself — about their preferences regarding pension drawdown in light of the new rules. Without this guidance, attorneys may default to a conservative approach that inadvertently creates a larger IHT liability for the estate.
There is also a broader point about the timing of LPA applications. Clients who have not yet put an LPA in place should be encouraged to do so urgently, before any deterioration in mental capacity. The Office of the Public Guardian's processing times, while improving, mean that the window between application and registration can still be several months. Clients who lose capacity before an LPA is in place may find that their attorneys are unable to act on the new pension planning strategies in time.
Trust Planning in the New Landscape
The 2027 changes do not diminish the value of trust planning — in many respects, they enhance it. However, advisers need to be aware of some important nuances.
Discretionary trusts remain a valuable tool for flexibility and asset protection. A discretionary trust within a Will allows trustees to adapt distributions to the circumstances of beneficiaries at the time of death, taking into account the IHT position of the estate, the tax positions of individual beneficiaries, and any other relevant factors. This flexibility will be particularly valuable in the new environment, where the interaction between pension values and the free estate may create complex IHT calculations.
Life policies written into trust are likely to become an increasingly important planning tool. A whole of life policy written into a discretionary trust can provide a tax-free lump sum on death, specifically designed to meet the IHT liability on the estate — including the pension. Because the policy proceeds are held in trust, they fall outside the estate and are not themselves subject to IHT. For clients with significant pension pots who expect to face an IHT charge from 2027, this approach can provide certainty and liquidity for beneficiaries.
One important point to note is that lump sum payments from pension schemes into bypass trusts will be within scope of IHT from April 2027. The previous use of bypass trusts as a mechanism to receive pension death benefits outside the estate will no longer provide IHT protection. Advisers should review any existing bypass trust arrangements with clients.
The Complexity of Estate Administration
The impact of the 2027 changes on estate administration cannot be overstated. The role of the Legal Personal Representative (LPR) — whether a professional executor or a family member — is set to become significantly more complex and time-consuming.
Under the new rules, LPRs will be responsible for reporting and paying IHT on pension assets, as well as coordinating with Pension Scheme Administrators (PSAs). The process involves multiple stages: identifying all pension arrangements, notifying PSAs of the death, obtaining probate valuations for each pension pot, calculating the apportioned IHT liability across the free estate and each pension, and then arranging payment within the six-month deadline.
Where a client has multiple pension pots with different nominated beneficiaries, the IHT must be apportioned across each pot in proportion to its value. If the estate value changes during administration — for example, if a property sells for less than the probate valuation or previously unknown assets are discovered — these apportionment calculations must be redone, and any refunds or additional payments coordinated between the free estate and the pension beneficiaries. Given that estate administration already averages 18 months, these additional layers of complexity will inevitably extend timelines and increase costs.
LPRs will have the ability to issue a "withholding notice" to PSAs, instructing them to retain up to 50% of taxable pension benefits for up to 15 months after the end of the month of death. This provides a mechanism to ensure funds are available to meet the IHT liability, but it also means that beneficiaries may face delays in receiving their inheritance. The IHT payment deadline of six months from the end of the month of death remains unchanged, and interest on unpaid IHT is currently running at 7.75% — a significant incentive to ensure the administration process is managed efficiently.
One of the most significant practical consequences of the 2027 changes is the reduction in the number of "excepted estates" — those that can be administered without a full IHT400 submission to HMRC. As pension values are drawn into the taxable estate, many estates that would previously have qualified as excepted will now require a full IHT account, adding further time and cost to the administration process.
What Advisers Should Be Doing Now
The 2027 changes are now less than a year away, and the time for proactive planning is now. The following table sets out the key actions that different types of professional adviser should be prioritising with their clients:
| Adviser Type | Key Actions |
| IFA / Financial Planner | Review decumulation strategies; consider "spend pension first" for clients over 75; review Expression of Wish forms; explore life policies in trust to fund IHT liability; model combined IHT and Income Tax scenarios |
| Estate Planner / Will Writer | Review all existing Wills where pension nominations are a factor; ensure nominations align with Will strategy; advise on RNRB tapering risk; consider discretionary trust provisions in Wills |
| Accountant | Model IHT liability including pension values; advise on income tax implications for beneficiaries; consider pension consolidation and drawdown timing strategies |
| Mortgage Adviser | Consider clients' overall estate position where property and pension values together may trigger IHT; flag the need for estate planning reviews to clients approaching retirement |
The overarching message is one of collaboration. The 2027 pension changes sit at the intersection of financial planning, tax advice and legal planning in a way that no single adviser can address in isolation. The most effective outcomes for clients will come from IFAs, accountants and estate planners working together, sharing information and developing integrated strategies.
A New Era for Estate Planning
The inclusion of pensions within the IHT net from April 2027 marks the end of an era. For many clients, the pension was the centrepiece of their estate planning strategy — the asset that would pass to the next generation free of tax, providing a meaningful legacy. That certainty is gone.
In its place comes a more complex, more nuanced landscape — one in which the interaction between pension values, Nil Rate Bands, Residence Nil Rate Bands, trust structures, LPAs and Will nominations must all be considered together. The risk of getting this wrong is not merely a missed planning opportunity; it is the prospect of beneficiaries facing a combined tax rate approaching 70% on inherited pension wealth.
For professional advisers, this complexity represents both a challenge and an opportunity. Clients who receive clear, proactive, joined-up advice will be significantly better positioned than those who do not. The advisers who engage with these changes now — who review their clients' estate plans, update their nominations, explore trust and insurance solutions, and ensure their LPAs are fit for purpose — will provide a level of value that is genuinely transformative.
Professional advice has always mattered in estate planning. From April 2027, it will matter more than ever.
At BTWC, we work with IFAs, mortgage advisers, accountants and estate planners to deliver comprehensive estate planning solutions for their clients. If you would like to discuss how the 2027 pension changes affect your clients' Wills, trusts and LPAs, or to explore how we can support your practice, please get in touch with our team.
References:
[1]Womble Bond Dickinson, Major Changes to Pensions and Inheritance Tax from April 2027: Implications for Charitable Giving, 6 February 2026. Available at: https://www.womblebonddickinson.com/uk/insights/articles-and-briefings/major-changes-pensions-and-inheritance-tax-april-2027-implications
[1]HM Revenue & Customs, Inheritance Tax — Unused Pension Funds and Death Benefits, Policy Paper, 26 November 2025. Available at: https://www.gov.uk/government/publications/inheritance-tax-unused-pension-funds-and-death-benefits/inheritance-tax-unused-pension-funds-and-death-benefits
Please note, this article does not constitute as financial, tax or legal advice. Always consult a professional to asses your personal status.
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