The October 2024 UK Budget introduced one of the most significant shifts in inheritance tax (IHT) policy in recent decades. From 6 April 2027, most unused pension funds will be brought into an individual’s taxable estate for IHT purposes. For many high-net-worth individuals (HNWIs), this change could have a major impact on wealth transfer planning.
Whether you live in the UK or abroad, it’s vital to understand how these reforms will work and what steps you can take to adapt your estate planning strategy.
Key Changes to IHT on Pensions
From April 2027:
- Most pension funds will fall inside the estate for IHT purposes, including:
- Lump sum death benefits
- Beneficiary’s drawdown funds
- Death benefits paid as an annuity
- Lump sums paid into bypass trusts will also be in scope for IHT.
- Scheme pensions and charity lump sum death benefits will remain exempt.
- The current advantage of pensions being outside the estate because benefits are paid at the scheme’s discretion will disappear.
- IHT will be charged on the gross value of the pension fund immediately before death, before funds are distributed to beneficiaries.
In short: pensions will no longer automatically escape IHT – a fundamental shift that will affect estate planning for millions.
Who Will Be Most Affected by change in IHT rules?
If the total value of your estate, including your pension, is below the IHT thresholds (currently £325,000 nil-rate band plus up to £175,000 residence nil-rate band per person), you may not see an immediate impact.
For married couples and civil partners, this can mean a combined threshold of up to £1 million before IHT becomes payable.
However, many HNWIs and retirees – particularly those with substantial pension savings – will now see their estates pushed into IHT territory for the first time.
Why This Matters for Estate Planning
IHT is consistently one of the UK’s most disliked taxes, levied at 40% on the value above available thresholds. With the nil-rate band frozen until April 2030, more estates will fall into scope as asset values rise.
For wealthier families, pensions have historically been a powerful estate planning tool because they could be passed outside the estate. This reform removes that advantage, meaning:
- The value of unused pension funds could trigger IHT liabilities.
- Combined with property and investments, many estates will face significantly higher tax bills.
- Strategies will need to shift from simply retaining funds in a tax-advantaged pension wrapper to actively planning for IHT on those funds.
Strategies to Consider Before April 2027
1. Life Cover in Trust to Offset the IHT Liability
If pension funds will remain untouched for retirement income, a life insurance policy written in trust can provide beneficiaries with the cash to pay the IHT due.
- For couples, a joint life second death policy can be cost-effective.
- Premiums may fall under the normal expenditure out of income exemption, avoiding further IHT issues.
2. Withdrawing Funds and Planning Outside the Pension
For those not reliant on pension income, withdrawing funds – especially after age 75 – may be worth considering. This allows:
- Making outright gifts (potentially exempt transfers).
- Using discretionary trusts for controlled distribution.
- Accessing loan trusts or discounted gift trusts to retain some benefit while removing value from the estate.
Note: Withdrawals above the tax-free cash allowance will be subject to income tax.
3. Business Relief Investments
Investing in qualifying assets can offer up to 100% IHT relief after two years (reducing to 50% for certain assets from April 2026). While these carry higher risk and lower liquidity, they can be an effective tool when combined with other strategies.
4. Combining Multiple Solutions
In practice, a tailored estate plan might use a mix of:
- Gifting strategies
- Trust structures
- Business Relief investments
- Life cover
- Drawdown sequencing across different asset classes
Cross-Border Considerations
If you are a UK national living abroad – for example in Portugal, Spain, or Dubai – your UK pension may still be subject to UK IHT, depending on your domicile status. Local inheritance taxes and double tax treaties can complicate matters further, making specialist cross-border advice essential.
Conclusion: Act Before the Deadline
The April 2027 pension IHT reforms represent a paradigm shift in estate planning. For many, pensions will go from being a protected, tax-efficient wealth transfer vehicle to a potentially significant IHT liability.
By acting early, you can:
- Quantify your exposure.
- Implement strategies to protect your wealth.
- Ensure your beneficiaries inherit as much as possible.
Blacktower Financial Management has been helping clients manage pensions, investments, and estate planning for over 35 years. Our advisers specialise in working with HNWIs and expatriates to navigate complex, evolving tax rules.
📞 Contact us today for a confidential review of your pension and estate plan of the 2027 reforms.
This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.