From 6 April 2027, an important change is being made to the way in which pensions are treated for Inheritance Tax.
At present, many pension funds sit outside a person’s estate for Inheritance Tax purposes. From 6 April 2027, most unused pension funds and pension death benefits will instead be brought into the value of the deceased person’s estate when calculating Inheritance Tax.
For some families, this will make little or no difference. For others, particularly those with substantial pension savings and estates which are already liable to Inheritance Tax, it could increase the tax due significantly.
What is changing to Inheritance Tax on pensions?
For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be taken into account when calculating the value of a person’s estate for Inheritance Tax. The changes were enacted in the Finance Act 2026.
The deceased person’s personal representatives or executors will generally be responsible for obtaining the relevant pension information and reporting the pension values as part of the Inheritance Tax process.
HMRC is continuing to publish detailed guidance about how the new system will operate before the rules take effect.
Does my Will control my pension?
No. This is one of the most important points to understand. Your Will controls the assets which pass under your estate.
Your pension is normally governed separately by the rules of the pension scheme. In many schemes, the pension trustees decide who will receive death benefits, taking account of any expression of wishes or beneficiary nomination you have made.
Your Will does not override that nomination and it does not direct the pension trustees.
From April 2027, however, the value of many pension benefits may still be taken into account when calculating Inheritance Tax on your death. So although your Will and pension remain legally separate, both need to be considered when looking at the overall tax and estate-planning position.
Will all pension benefits be subject to Inheritance Tax?
No. The new rules apply to most unused pension funds and pension death benefits, but there are important exceptions.
In particular, death-in-service benefits payable from a registered pension scheme will remain outside the deceased person’s estate for Inheritance Tax purposes.
Certain dependant’s scheme pensions from defined benefit and collective money purchase arrangements are also excluded.
The exact treatment will therefore depend upon the particular pension and the benefits payable following death.
Do I need to change my Will because of the pension changes?
Not necessarily. There is no special new type of Will which avoids the pension changes, and a Will cannot control where pension benefits are paid.
However, the new rules may change someone’s overall Inheritance Tax position enough to make a Will and estate-planning review worthwhile. This is particularly relevant for people whose estates are already substantial.
A qualifying estate can currently benefit from a £325,000 nil-rate band and, where the conditions are satisfied, a residence nil-rate band of up to £175,000.
Unused allowances can potentially be transferred between spouses or civil partners, meaning that a qualifying estate on the second death can in some circumstances benefit from allowances totalling up to £1 million.
However, the residence nil-rate band is subject to conditions and begins to taper away where the estate exceeds £2 million.
For many homeowners in Buckinghamshire and the South East, the family home alone will account for a very substantial part or all of these allowances.
Where the estate is already likely to be liable to Inheritance Tax, adding a significant pension fund to the calculation may therefore increase the tax bill materially rather than simply pushing the estate marginally over a threshold.
So what can a Will and estate-planning review actually achieve?
A Will review cannot remove the pension from the new Inheritance Tax rules. Its purpose is to make sure that the arrangements under the Will still work properly once the pension is taken into account.
For example, a review can consider:
- who is inheriting the estate under the Will;
- whether the Will is making appropriate use of spouse or civil partner exemption;
- whether charitable gifts or other exemptions are relevant;
- whether any trusts contained in the Will still serve the intended purpose;
- whether large cash or specific gifts remain sensible once the likely Inheritance Tax position is considered; and
- whether the overall arrangements still achieve what the client intends on the first and second deaths.
The pension remains separate from the Will, but the tax consequences now need to be considered as part of the same overall estate-planning picture.
Could the new rules change who should receive pension death benefits?
Potentially, yes. Historically, where pension death benefits sat outside the estate for Inheritance Tax purposes, there was often no particular Inheritance Tax advantage in nominating a spouse or civil partner to receive them.
For some families, it therefore made sense for pension death benefits to pass directly to adult children or other beneficiaries, while other assets passed to the surviving spouse under the Will.
From 6 April 2027, that calculation may change. Where pension benefits are brought into the Inheritance Tax calculation, benefits passing to a surviving spouse or civil partner will usually qualify for the spouse exemption. Benefits passing directly to adult children will not.
For some married couples, this may therefore make it more attractive for pension death benefits to pass to the surviving spouse or civil partner.
That does not necessarily eliminate the Inheritance Tax issue. It may simply defer it.
The surviving spouse or civil partner may then have an even larger estate, particularly where there is also a valuable home, investments and other assets.
In appropriate cases, the next stage of the estate-planning conversation may therefore be substantial lifetime gifting after the first death.
Could lifetime gifts help?
Potentially. A surviving spouse or civil partner who has inherited substantial assets may decide to make lifetime gifts to children or other family members.
An outright lifetime gift to an individual will generally be a potentially exempt transfer. If the donor survives seven years from the date of the gift, it will normally fall outside their estate for Inheritance Tax purposes.
Lifetime gifts can therefore be an important part of longer-term estate planning.
Depending upon the circumstances, it may also be possible to use:
- the annual exemption;
- gifts on marriage or civil partnership;
- small gifts; and
- the normal expenditure out of income exemption, where the statutory conditions are met.
The normal expenditure out of income exemption can be particularly valuable for people with significant surplus income, but careful records should be kept and the conditions must be satisfied.
Lifetime gifting is not suitable for everyone. The donor must retain enough assets and income for their own needs, and gifts must be genuine. A gift where the donor continues to enjoy the benefit of the asset may be caught by the gift-with-reservation rules.
The correct strategy will depend upon the family circumstances, the size and composition of the estate and the donor’s own financial needs.
Does this mean everyone should nominate their spouse for their pension?
No. There is no single answer. For some families, spouse exemption followed by sensible lifetime gifting may be tax-efficient. For others, passing pension benefits directly to children may still be appropriate for family, financial or practical reasons, even if there is an Inheritance Tax cost.
The important point is that pension nominations which made sense under the old rules should not simply be assumed to remain optimal after April 2027.
A review should consider:
- who currently receives the pension death benefits;
- who inherits under the Will;
- whether spouse or civil partner exemption is being used;
- whether the surviving spouse is likely to make lifetime gifts;
- how the arrangements work on the second death as well as the first; and
- whether the overall plan still reflects the family’s wishes.
This is an area where legal advice and pension advice may need to dovetail.
What about my pension beneficiary nomination?
Your pension beneficiary nomination remains important, but it is separate from your Will. Depending upon the scheme, it may tell the pension trustees who you would like to receive the pension benefits when you die. It should be reviewed periodically, particularly after marriage, divorce, the birth of children or grandchildren, or a significant change in financial circumstances.
The new Inheritance Tax rules make it more important to know what your nomination says because the identity of the pension beneficiary may affect the overall Inheritance Tax position.
However, changing a pension nomination is not something that is done through your Will.
Who pays the Inheritance Tax on pension benefits?
The deceased person’s personal representatives will generally be responsible for reporting the relevant pension benefits as part of the Inheritance Tax process.
The new regime also includes mechanisms which allow Inheritance Tax attributable to pension benefits to be paid from the pension funds themselves in appropriate circumstances.
A pension scheme administrator may therefore be able to withhold or pay the tax from the pension benefit before the balance is paid to the beneficiary.
This is intended to avoid the ordinary estate having to fund tax attributable to pension benefits which are passing outside the Will.
The detailed procedure will depend upon the circumstances and HMRC is continuing to publish guidance before the rules come into force.
Could pension benefits also be subject to Income Tax?
Potentially. Inheritance Tax and Income Tax are separate taxes and the treatment of pension death benefits depends on the type of pension, the benefit being paid and the circumstances of the deceased and beneficiary.
The existing Income Tax rules will continue to interact with the new Inheritance Tax regime.
Further HMRC guidance is expected before the new rules come into force, so anyone dealing with a substantial pension inheritance should take appropriate pension or tax advice.
Are Chiltern Wills pension advisers?
No. Chiltern Wills advises on Wills, estate planning, lifetime gifts, powers of attorney and probate.
We do not advise on pension products, pension transfers, drawdown, investment strategy or whether a pension should be retained, transferred or restructured. Those are matters for a suitably qualified financial adviser or pension specialist. We can suggest someone suitable if you would like.
What we can do is advise on the Inheritance Tax and estate-planning implications of your Will, your wider estate and lifetime gifting.
Where pension planning forms an important part of the picture, we are happy to work alongside your financial adviser, pension adviser or accountant.
What should I do before April 2027?
There is no need to make changes simply because the rules are changing. However, if you have significant pension savings and a substantial estate, this is a sensible time to check that your arrangements still work as intended.
In particular, consider whether:
- your Will still reflects your wishes;
- your pension beneficiary nomination is up to date;
- you know who is likely to receive your pension;
- your Will still works sensibly once the pension is included in the Inheritance Tax calculation;
- the use of spouse or civil partner exemption should be reconsidered;
- lifetime gifting may form part of the longer-term estate-planning strategy; and
- your solicitor, financial adviser and accountant are working from the same overall picture.
For many clients, no change to the Will will be required.
The purpose of the review is to identify whether the new pension rules alter the assumptions on which the existing estate planning was based.
How Chiltern Wills can help
At Chiltern Wills, we regularly advise clients with substantial estates on reviewing their Wills and estate-planning arrangements following changes in family circumstances, asset values or tax rules.
We can advise on how your existing Will operates, whether it still reflects your wishes and whether the forthcoming pension changes mean that your Will or wider estate planning should be reconsidered.
We can also advise on lifetime gifting and the Inheritance Tax implications of gifts made during your lifetime.
About Rebecca D’Arcy
Rebecca D’Arcy is the principal of Chiltern Wills LLP, a specialist Will writing and estate-planning practice based in Beaconsfield and serving clients across Buckinghamshire and the Chilterns.
Rebecca is a qualified solicitor with nearly 20 years of legal experience advising on Wills, powers of attorney, probate and estate planning.
If you would like to arrange an appointment to review your Will or discuss your estate planning, please email info@chilternwills.com.
Chiltern Wills works on a transparent, fixed-fee basis. You can see our current fees on the Fees page of our website.
This article provides general information only and is not individual legal, tax, investment, pension or financial advice. The rules discussed above apply to deaths on or after 6 April 2027. HMRC is continuing to publish detailed guidance before implementation.
