Your pension and inheritance tax: what the April 2027 changes mean for UK households

Your pension and inheritance tax: what the April 2027 changes mean for UK households

For decades, unspent pension savings sat outside the inheritance tax net — a useful way to pass wealth to children or grandchildren without a large tax bill. That is about to change. From April 2027, money left in a defined contribution pension after your death will be counted as part of your estate for inheritance tax (IHT) purposes. For many middle-income households, this is a significant shift that financial advisers say warrants action now, not next year.

What's happening

At present, pension savings are not normally included in a person's estate when calculating inheritance tax. But Chancellor Rachel Reeves has confirmed that from April 2027, unspent defined contribution pension savings — also called money purchase pensions — will be pulled into the IHT calculation.

Defined contribution pension (technical definition): a pension where contributions from you and/or your employer are invested, and the final pot depends on those contributions and investment returns. Most workplace pensions and all private pensions are this type.

In plain English: if you die with money still sitting in your pension pot that you never drew down as income, that money will now count toward your taxable estate.

The standard IHT rate is 40%, charged only on the portion of an estate that exceeds the tax-free threshold of £325,000. There is an additional allowance for residential property passed to direct descendants. The spousal and civil partner exemption is unchanged — everything can still be left to a spouse or civil partner without triggering IHT.

Why it matters

Before this change, many people deliberately left pension savings untouched, drawing on other assets first, precisely because pensions were IHT-free. That strategy no longer works from April 2027.

Rachael Griffin at investment firm Quilter told the Guardian that bringing unused pension pots within IHT scope means the tax "is now firmly a middle-income issue." Nicholas Nesbitt, a partner at accountancy firm Forvis Mazars, said: "The time for planning is now. We're seeing clients shifting their planning strategies, increasing retirement spending and accelerating gifting to cut the tax bill."

For some families, the potential bill could run into five or six figures, depending on the size of the pension pot and the overall value of the estate.

Who is affected

• Anyone with a defined contribution (money purchase) pension who expects to leave unspent savings at death
• People whose total estate — including property, savings, investments, and now pension — could exceed £325,000
• Families where the pension was being preserved as a tax-efficient inheritance vehicle
• The change does not affect money already converted to income (for example, through an annuity) or pensions left to a spouse or civil partner

If your estate is comfortably below the IHT threshold even after including your pension, this change may not affect you directly. If you are uncertain, that uncertainty is worth exploring with a regulated financial adviser.

What to do next

There is no single right answer — the best approach depends on your age, health, income needs, and family circumstances. Below are the main options being discussed by financial planners.

Spend more pension money now The most straightforward option for those who can afford it is to draw down more pension cash and spend it — on yourself, on family experiences, or on practical support for relatives. Financial planners report an increase in older clients withdrawing pension funds to pay for family holidays or other shared experiences. The key caution: make sure you retain enough to support yourself through later retirement, when care costs can be significant.

Buy an annuity An annuity converts a lump sum from your pension into a guaranteed regular income for life (or a fixed term). Once the money is used to buy an annuity, it is no longer sitting as an "unspent" pension pot. Annuity sales reached a record high in 2025, partly driven by better rates than in previous years. A 65-year-old using £100,000 to buy a basic single-life level annuity could currently secure around £7,800 per year, rising to approximately £8,500 at age 70 and £9,700 at age 75, according to Guardian reporting. You will need to choose between single-life and joint-life policies, and between level and escalating income.

Make tax-free gifts The new rules have prompted a wave of gifting. Key allowances to be aware of:

• Annual exemption: you can give away up to £3,000 per tax year, free of IHT. Unused allowance carries forward one year, so two grandparents could give £6,000 each in a single year.
• Small gifts allowance: up to £250 per person, per tax year, to as many people as you like (as long as no other allowance has been used for the same person).
• Potentially exempt transfers (PETs): gifts of any amount to any person are free of IHT provided you survive for seven years after making them.
• Gifts from regular income: you can give away money regularly from income — not capital — without IHT, as long as it does not reduce your own standard of living. Examples include contributing to a grandchild's Junior ISA or paying school fees.

Gifting from income is not straightforward to document correctly, so professional advice is recommended.

Pay off a grandchild's student loan Some families are using pension withdrawals to reduce a grandchild's student debt. You can make a repayment toward someone else's student loan using only their surname and customer reference number — no account access needed. However, this counts as a gift under IHT rules, so the usual gifting considerations apply.

Take out whole-of-life insurance Some people are using whole-of-life insurance policies — written in trust — to cover a potential IHT bill, so beneficiaries do not need to sell the family home or other assets to pay it. Sales of this type of policy have increased. The key risk: if you miss premium payments later in life, you can lose both the cover and all premiums paid to date. Any policy needs to be affordable on a long-term basis.

Sources

• The Guardian: Money — Your UK pension is no longer safe from inheritance tax: what should you do? (published 25 April 2026)