Inheritance Tax on pensions – planning options before 6 April 2027

May 19, 2026

Original content provided by

From 6 April 2027, pensions will no longer be exempt from inheritance tax (IHT). Many people will be wondering what they should be doing with their pensions to pass on their wealth efficiently. This article explores the rule changes and what planning options you could consider to pass on your wealth.

At the time of writing, Finance Act 2026 has been enacted and includes much of the new legislation. However, the Government could amend some of that legislation before it comes into force, and additional legislation on related matters is likely.

If you’d like to discuss your options with our team of personal tax specialists, please get in touch – your appointments are tailored to you and always confidential.

Pension planning beyond tax

Accessing your pension benefits requires careful planning from an investment point of view as well as from a tax perspective. This article only explores the tax position for a number of your options, and should not be construed as investment advice; you should consult a suitably qualified independent financial adviser before taking any action.

Please also remember that there are many ‘pension scams’ being marketed. The golden rule is that if it seems too good to be true, it probably is.

With these caveats in mind, we look at what options are available and how pension holders should approach these big decisions.

How are inheritance tax rules changing?

We know that:

The residual value of your pension fund will be included in your estate on death from 6 April 2027. The residual value constitutes any funds not drawn down from a defined contribution pension or, for defined benefit schemes, the pension protection lump sum death benefit
Spousal and charity IHT exemptions will be extended to cover residual pension funds left to spouses, civil partners and charities on death
Business relief (BR) and agricultural relief (AR) will not be available for assets held by your pension scheme.
The IHT cost should be borne by the beneficiary receiving your pension (the Pension Beneficiaries), but administration for the IHT will rest with your personal representative (PR) or executor.

What is not changing?

The income tax rules remain unchanged, in that:

When you first access your defined contribution pension, you can take a pre-commencement lump sum (PCLS) tax free, being 25% of the lower of the pension value and your available lump sum and death benefit allowance (LSDBA); in most cases the LSDBA is £1,073,100.
Other withdrawals are subject to income tax at your marginal rate of tax, and PAYE is applied at source.
If you have a defined contribution pension and die before your 75th birthday, your Pension Beneficiaries should be able to draw on the pension fund tax-free.
In contrast, if you die aged 75 or older, your pension beneficiaries will be subject to income tax at their marginal rate when accessing any residual funds. However, if you did not ‘crystalise’ all your pension before your death (ie by taking pension benefits), the pension beneficiaries may be able to draw a 25% tax free PCLS to the extent your LSDBA had not been fully utilised.
For defined benefit schemes, dependents pensions are taxed regardless of when the scheme member dies although part of any lump sum (ie the balance of the member’s remaining LSDBA) can be paid tax free.
Death in service payments remain tax-free.

General Inheritance Tax rules

From an IHT perspective, the normal exemptions for gifts remain unchanged:

Gifts of cash are a ‘potentially exempt transfer’ (PET) and no IHT is payable providing you survive seven years. If you die within seven years, the PET will be brought into your estate for IHT purposes.
- Your nil rate band (and spousal nil rate band if appropriate) will be applied first against the lifetime gifts, meaning that any IHT payable on PETS is essentially passed on to the death estate and 40% will then apply.
- It is only to the extent that your lifetime gifts exceed your nil rate bands that the IHT becomes payable by the recipient of the gift, and a lower, tapered, IHT rate might apply if you survived at least three years.
Regular gifts made out of your income should be exempt for IHT both when the gift is made and on death. This could apply if you had surplus income each year (taking into account your living expenditure) and you made regular gifts from the excess. However, this relief may not apply in all circumstances – see below.
Other fixed sum IHT exemptions may be available depending on the reason for the gift - for example, your annual allowance (£3,000), marriage gifts (£1,000 to £5,000), small gifts (£250).

How to plan for Inheritance Tax

There are a number of things that you should be looking at with your advisers in order to prepare for the changes.

Review your succession and wealth strategies

Historically, for individuals with both personal pensions and other investment assets, the IHT exempt status for pensions has encouraged them to, where possible, finance their retirement spending from other funds (which would be liable to IHT).

Now, with pensions coming within the scope of IHT, any planning advantage to passing on pension funds is gone. However, it should be noted that for those in defined contribution schemes who die before age 75, there is still a possibility that their beneficiaries could draw down funds (where the scheme allows) without an income tax charge.

This has changed the IHT planning landscape and it is vital that any wealth succession plans you may have begun to implement are reviewed against the new rules. For example, family members inheriting your pension pot on your death after 6 April 2027 might only receive 33% of the fund value after 40% IHT and up to 45% income tax (on the balance) has been applied.

Of course, if you have already given away assets to the next generation, leaving yourself with just sufficient wealth to fund your (and your spouse’s or civil partner’s) retirement, then you may not be in a position to take any further action now to deal with this additional IHT cost, as to do so will almost certainly involve giving away more assets.

However, if you still hold both non-pension assets and funds in your pensions, then there may be scope to make lifetime transfers now to reduce the likely IHT on your estate. Alternatively, recognising that pension beneficiaries may now receive less than you expected on your death, you may want to consider making additional provision for those beneficiaries in your Will.

Follow up review at age 75

It is always sensible to review your wealth succession planning on a regular basis as life changes but, for defined contribution pension holders, given that your pension beneficiaries are likely to be subject to income tax on drawdowns after your 75th birthday (in addition to IHT), it is particularly important to review your plans again as you approach 75.

Business and agricultural assets

Historically, and for commercial non-tax reasons, it has been common for business and agricultural assets (particular shares in a family company, farmland and trading premises) to be acquired by a SASS or a SIPP. Such a move was wholly IHT-neutral, because either BR or AR would have applied while the assets were held personally, and the pension exemption would apply after the acquisition.

With the extension of IHT to pensions, if there is scope to obtain some IHT relief outside the pension fund, you should explore the possibility of extracting any business and agricultural property from your pension. However, extracting assets from a pension needs careful consideration and professional advice – particularly around the ownership structure, valuation and the potential SDLT and income tax charges (depending on the route you choose).

Often, the simplest option is for the business owner or the trading entity to buy the assets back from the pension fund, but it is important that market value is paid to prevent an ‘unauthorised payment charge’.

Planning to reduce your estate

Under the new rules IHT will be payable regardless of whether your wealth is held personally or in your pension, and income tax will be payable by you or your beneficiary (if you are 75 or older at death) when drawing out pension funds. Therefore, in many cases it will not matter which assets you give away to reduce the value of your estate for IHT purposes. On that basis there are several broad types of planning that could be appropriate for your family:

Gifts of non-pension assets: you might consider making gifts out of non-pension assets. You can then make larger withdrawals from your pension to fund your retirement in the usual way. Such gifts would be a Potentially Exempt Transfer, and IHT free if you survive 7 years. And, providing you survive at least 3 years, even if such gifts are chargeable, the rate of IHT payable might be reduced. Income tax will of course be payable on any additional pension withdrawals you take.

Take the tax-free cash from your pensions

If you have not yet crystallised your pension, you might consider taking your 25% tax free lump sum from it. Making a gift of the cash withdrawn should again be a PET and IHT-free providing you survive 7 years, reduced rates of IHT apply if you survive 3 years.

Withdrawing your pension benefits

If you withdraw your pension over a short period, gifts to family members can still be made as PETs. You will pay income tax on the withdrawal, but providing you survive 7 years there may be no IHT, meaning that your beneficiaries receive at least 55%. Again, surviving at least 3 years might reduce the rate of IHT payable by the recipient.

Gifts out of income

If you have excess income each year, you might consider making regular gifts out of that excess. This should be IHT free if structured correctly and does not have a survivorship time requirement. However, HMRC will require your executors to prove that you had surplus income and had planned to make regular gifts from it.

Although regular withdrawals from a ‘drawdown’ pension will be subject to income tax, HMRC may not necessarily regard them as ‘income’ for the purposes of the IHT gifts out of income exemption. This is particularly true if they have been extracted specifically to fund a gift to your descendants. For example, your tax-free lump sum is unlikely to qualify as surplus ‘income’: such a gift would be treated as a PET.

However, if you have used your pension fund to buy an annuity which provides you with a consistent source of income throughout your retirement, this should be considered income. If your annuity income, together with other income from investments, is more than enough for your regular spending needs, gifting the surplus to family members could qualify for the gifts out of income exemption.

Getting expert advice

Managing the future IHT exposure for your pension fund is likely to be just one of many issues that your wealth succession plan needs to address. Our dedicated private wealth team can help you work through your financial goals for your family and to build a succession plan that can achieve them in a tax-efficient way.

Speak to the team