Pensions and Inheritance Tax from April 2027: What It Means for Your Will

For many years, a pension has been one of the most tax-efficient things you could leave behind. Unused pension savings usually sat outside your estate, so they passed to your loved ones free of inheritance tax. Many people deliberately spent their other savings first and left their pension untouched for exactly this reason.

That is about to change. From 6 April 2027, the government plans to bring most unused pension funds and pension death benefits into your estate for inheritance tax purposes. For families across London and Surrey, where house prices already push many estates close to the tax-free thresholds, this could mean an inheritance tax bill that nobody saw coming.

Here is what is changing, who it affects, and why now is a good time to review your will.

What Is Changing?

At the moment, if you die with money left in a defined contribution pension (such as a personal pension, SIPP or most workplace pensions), that money does not usually count as part of your estate. It can pass to the people you have nominated without inheritance tax being charged.

Under the new rules announced by the government, from 6 April 2027:

• Unused pension funds will be added to the value of your estate when working out inheritance tax
• Most lump-sum death benefits paid from a pension will also be included
• The normal inheritance tax rules will then apply, including the 40% rate on anything above your available tax-free allowances

Some benefits are expected to stay outside the new rules, including death-in-service benefits paid by a registered pension scheme and certain dependants' scheme pensions. The precise details matter, so it is always worth checking the latest position with your pension provider or a financial adviser.

Who Is Likely to Be Affected?

Inheritance tax is only charged on the part of an estate above the available allowances. As we explain in our guide to inheritance tax thresholds, each person has a nil-rate band of £325,000, plus a residence nil-rate band of up to £175,000 when a home is left to children or grandchildren. A married couple or civil partners can pass on up to £1 million between them.

Those thresholds have been frozen for years and are set to stay frozen for some time to come. Adding a pension pot on top of a family home and savings could take many ordinary estates over the line for the first time.

Consider a homeowner in Richmond or Kingston. Their house alone may be worth well over half a million pounds. Add savings, and then a pension pot of a few hundred thousand pounds that was previously ignored, and an estate that once sat comfortably under the threshold may now owe a significant sum.

You may be particularly affected if:

• You have a large defined contribution pension that you do not expect to spend in full
• You have been drawing on other savings first to keep your pension intact for your family
• You are single, widowed or divorced, so the spouse exemption is not available to you
• You are unmarried and living with a partner, who has no inheritance tax exemption at all
• Your estate is close to £2 million, where the residence nil-rate band starts to be lost

The £2 Million Taper: A Hidden Trap

This is one of the less obvious effects of the change. The residence nil-rate band, worth up to £175,000 per person, is gradually withdrawn for estates worth more than £2 million. For every £2 the estate is worth above that figure, £1 of the allowance is lost.

Once pensions count towards the value of your estate, some families will find their estate crosses the £2 million mark for the first time. The result can be a double blow: more of the estate is taxable, and part of the tax-free allowance disappears. For families in Esher, Weybridge and other areas with high property values, this is well worth checking.

What Stays the Same

Not everything is changing, and some important protections remain:

• Spouses and civil partners — anything passing to a husband, wife or civil partner remains exempt from inheritance tax, including pension funds
• Charities — gifts to charity remain exempt, and leaving at least 10% of your estate to charity can still reduce the rate on the rest from 40% to 36%
• Your allowances — the nil-rate band and residence nil-rate band still apply in the usual way

This means that for many married couples, the bigger impact will be felt when the second partner dies, when the combined estate, now including any pension, passes to children or other beneficiaries.

What About Unmarried Couples?

Unmarried partners have no inheritance tax exemption. Until now, many cohabiting couples relied on their pension nominations to provide for each other without any inheritance tax being due. From April 2027, a pension left to an unmarried partner could be taxed in the same way as any other asset above the threshold.

As we explain in our guide for cohabiting couples, unmarried partners already face real risks without a will. This change makes careful planning even more important.

Why This Matters for Your Will

Your pension is not usually passed on by your will. It normally goes to the people you name on your pension provider's nomination form (sometimes called an expression of wish). But once pensions count towards your estate for inheritance tax, your will and your pension need to work together.

A will review is a sensible step because:

• The tax bill falls on the estate as a whole. If your pension increases the inheritance tax due, that tax may affect what is left for the people named in your will, not just those who receive the pension.
• Your executors will have more to deal with. Under the new rules, the people dealing with your estate will need to take your pension into account. Choosing capable executors and leaving clear records will make their job much easier.
• Gifts may need rebalancing. If one beneficiary receives your pension and another receives your house, the tax may not fall where you expect. Your will can be drafted to keep things fair.
• Trusts may help. In some situations, a trust in your will can give you more control over how your estate is passed on and protected.
• Blended families need extra care. If you have children from a previous relationship, the interaction between your pension nomination, your will and inheritance tax becomes even more important. Our guide to wills for blended families explains why.

Practical Steps to Take Now

1. Find out what your pensions are worth. Gather recent statements for every pension you hold, including old workplace pensions from previous jobs.
2. Check your nomination forms. Make sure the people named are still who you want to benefit, especially after a marriage, divorce or bereavement.
3. Estimate your whole estate. Add up your home, savings, investments and pensions to see whether you may be above the thresholds, or close to £2 million.
4. Speak to a financial adviser about your pension. Decisions about how and when to draw your pension, or whether to make lifetime gifts, are financial planning decisions and should be made with a regulated financial adviser.
5. Review your will. Make sure your will reflects your current wishes and works alongside your pension, so your family is not left with an unexpected bill or an unfair result.

If it has been a few years since you made your will, our guide to when to update your will covers the other life events that should prompt a review too.

A Note on Advice

This article explains the planned changes in general terms. It is not financial or tax advice, and everyone's circumstances are different. The detailed rules may also be refined before they take effect. For decisions about your pension itself, please speak to a regulated independent financial adviser. I can help you make sure your will is clear, up to date and working alongside your wider plans.

How Abrahams Wills Can Help

I help families across Twickenham, Hounslow, Ealing, Chiswick and throughout London and Surrey make sure their wills reflect their wishes and their whole estate. With April 2027 approaching, now is a good time to check that your will still does what you want it to.

As a member of The Society of Will Writers, with over 25 years of legal experience, I explain everything in plain English during a home visit. A single will starts from £150 and a mirror will for couples from £250, including the visit, with no hidden fees. I visit clients 7 days a week, daytime or evening.