Until now, pensions have generally fallen outside the scope of Inheritance Tax, making them a key part of estate planning. You could save into one diligently, ignore it when thinking about your estate, and rest easy knowing it usually sat outside the grasp of HMRC.
That era is ending.
As discussed on the Accountable by Shorts podcast, from 6 April 2027, most unused pension pots are expected to be brought into scope for Inheritance Tax (IHT). For many families, this single reform will quietly turn pensions from a tax shelter into an unexpected liability.
It is, in the words of Shorts Private Client Senior Manager Mark Trevenna, “a massive change”. Far more people are exposed to these updates than they realise.
What’s changing with Inheritance Tax on pensions?
On Accountable by Shorts, Shorts tax partner Craig Walker and Mark Trevenna explained that pensions have traditionally been treated differently from other assets. Inheritance Tax was levied on property, savings, investments, etc., but pensions were usually exempt.
That assumption no longer holds.
From April 2027:
- Unused pension funds will generally form part of your estate
- They may face Inheritance Tax at 40%
- When beneficiaries later access the money, income tax may also apply
Mark Trevenna described this on the podcast as a “double whammy”: Inheritance Tax on death, followed by income tax when the pension is drawn. In some cases, the combined tax cost could exceed half the value of the original pension pot.
Why have the rules on Inheritance Tax and pensions changed?
According to Craig and Mark’s discussion, the government’s motivation is not difficult to spot. Pension saving comes with generous tax advantages during life: income tax relief on contributions and largely tax‑free growth.
HM Treasury’s view, as Craig Walker put it, appears to be that pensions were being used by some people not just for retirement, but as Inheritance Tax planning tools. Bringing pensions into the scope of IHT is designed to close that perceived loophole.
Crucially (and controversially) this change comes with no separate pension threshold. You won’t need a seven‑figure pension to be affected. Ordinary savers with multiple workplace pensions could also be pulled into the IHT net.
Who is most impacted?
One of the key warnings is that people who have never considered Inheritance Tax before may now need to.
The £325,000 nil‑rate band has been frozen since 2009, while:
- Property prices have risen
- Pension participation has increased
- Auto‑enrolment has expanded workplace saving
Add a pension pot to a modestly valuable home, and a previously IHT‑free estate can tip into taxable territory.
This is particularly uncomfortable for people who were specifically encouraged to save into pensions, with the implicit promise of favourable tax treatment.
Should you be using your pension differently now?
Possibly, but proceed with caution.
One theme that came through strongly in Accountable by Shorts was that knee‑jerk reactions can make things worse. Drawing down pensions purely to reduce Inheritance Tax may trigger:
- Higher income tax
- Loss of tax‑efficient growth
- Cash‑flow problems later in retirement
Tax planning, as Mark Trevenna reminded listeners, is rarely about eliminating one tax completely. More often, it’s about achieving a balanced approach. Inheritance Tax, income tax, and Capital Gains Tax rarely act independently.
Next practical steps to take
Before doing anything drastic, the podcast suggested starting with clarity:
1. Locate All Your Pension Pots
Many people have pensions scattered across old jobs. You can’t plan properly without knowing what exists.
2. Quantify the Inheritance Tax Risk
Once pensions are valued, you can see how much they increase your estate — and whether they cause the total value of your estate to be subject to IHT or could in the future.
3. Review Your Estate Plan as a Whole
Wills, gifting strategies, and how different assets are held all matter more once pensions are taxable. Also, review your current “expression of wishes” that you have lodged with each of your pensions. The pension scheme trustees will often apply your pension in line with your wishes.
4. Take Advice Early
As Craig Walker pointed out, time equals options. Planning done early is more effective than planning done late.
Final thoughts on on Inheritance Tax planning
The world of IHT has been changing significantly recently. Pensions are a prime example of how the IHT landscape has changed and that you need to keep up with these changes. Pensions are still valuable. They’re just won’t be untouchable from 6 April 2027.
Now is the time to evaluate your estate’s exposure to Inheritance Tax and formulate a plan that works for you.
Mark Trevenna
As a Private Client Senior Manager at Shorts and Chartered Tax Adviser (CTA), Mark regularly advises individuals and trustees on tax compliance and improving the tax efficiencies of the trusts and their estates. Mark has over 17 years of experience advising clients on Inheritance Tax and Capital Gains Tax.
View my articlesTags: Inheritance Tax (IHT)
