For years, pensions have sat slightly outside the usual inheritance rules. Money left in a pension on death has generally fallen outside the taxable estate, which made it a useful way of passing wealth to children and grandchildren, especially for people who could afford to leave the pot untouched.
That is changing. From 6 April 2027, the rules are due to shift, so it is worth understanding what is actually changing, and what is staying the same, before the new rules arrive.
What's Actually Changing
The Finance Act 2026 received Royal Assent on 18 March 2026. It confirms that, from 6 April 2027, most unused pension funds and pension death benefits will be included in the value of a person's estate for Inheritance Tax purposes. If that takes the estate above the available nil rate band, the excess may be subject to Inheritance Tax at 40 percent, in line with the rest of the estate and depending on the wider estate position, exemptions and reliefs.
There are still important exemptions. Pension funds passing to a surviving spouse or civil partner remain exempt, as does anything left to a registered charity. If someone dies before 6 April 2027, the current rules continue to apply, even if the pension benefits are paid to beneficiaries after that date.
In short, this is a real change to how pensions are treated on death, not just a small technical tweak.
Who This Actually Affects
It is worth being precise here, because headlines about Inheritance Tax can sound more dramatic than the detail. The government's own estimates suggest that, of the roughly 213,000 estates expected to include pension wealth in the 2027 to 2028 tax year, around 10,500 are likely to face an Inheritance Tax charge because of this change.
That is a minority of estates, not a change that affects everyone. Most people with modest pension pots, or those planning to leave everything to a spouse, may see little practical difference. The change is more relevant for people with larger estates, especially where pension savings had deliberately been left untouched as a way of passing wealth on while other assets were used to fund retirement.
The Great Wealth Transfer Backdrop
This change comes at an important time. Over the coming decades, the UK is expected to see one of the largest transfers of wealth between generations, as older, asset-rich generations pass estates on to children and grandchildren. Property, savings and pensions have all formed part of that picture.
Until now, pensions were often the quiet, tax-efficient part of that transfer because they usually sat outside the estate. Bringing them into scope changes the calculation. For some people, it may mean using pension income more actively during retirement rather than preserving the pot. For others, it may mean reviewing who inherits what, and when.
What Doesn't Change
It is also worth being clear about what this does not affect. Tax relief on pension contributions is unchanged. A pension remains one of the most efficient ways to build retirement income, particularly for higher earners. This is a change to how unused pension funds are treated after death, not a reason to assume pensions are no longer worthwhile.
Tax treatment depends on individual circumstances and rules may change, so decisions should be reviewed in the context of your wider retirement, estate and family position.
A Year to Plan, Not to Panic
There is still time to review things properly. Rushing into decisions close to April 2027 is unlikely to be helpful, so the best approach is to look at the position calmly and in good time.
For most people, that means checking expression of wishes forms and beneficiary nominations, reviewing how the pension fits with the wider estate and will, and thinking about whether the balance between drawing pension income and preserving other assets still makes sense.
At Pension Pulse, we are not going to call this a crisis, because for most people it is not. But it is a genuine change, and it is worth understanding properly. If you would like to know whether it affects your position, and what, if anything, may be worth adjusting, we would be glad to talk it through.
