For nearly two decades, pensions have sat outside the taxman’s reach at death. Build up a defined contribution pot, don’t draw it all down, and whatever’s left has generally passed to your chosen beneficiaries free of Inheritance Tax (IHT). It’s one of the reasons many advisers have quietly encouraged clients with other assets to spend those first and preserve pension wealth for as long as possible.

From 6 April 2027, that logic changes. Unused pension funds and most death benefits will be brought within the value of your estate for Inheritance Tax purposes, under legislation confirmed in the Finance Act 2026. It’s a genuine shift in the rules of the game – and it’s worth understanding properly before deciding whether, or how, it should change your own plans.

What’s actually changing

From that date, most defined contribution pension pots that haven’t been drawn down, along with most lump sum and continuing death benefits from defined benefit schemes, will count towards the value of your estate when you die. Your personal representatives (usually your executors) will need to identify every pension you held, obtain a valuation, and include it in the Inheritance Tax account submitted to HMRC – in much the same way they already do for property, savings and investments.

This only applies to deaths on or after 6 April 2027. If you die before then, current rules still apply even if benefits are paid out to your family afterwards.

Not everything is caught. HMRC’s technical note sets out several categories of “excluded benefit” that stay outside the calculation, including:

• Death in service benefits paid because you were employed (or in comparable work) at the point of death
• Dependants’ scheme pensions paid to a surviving spouse, civil partner, or other financial dependant
• Dependants’ or nominees’ annuities purchased alongside your own lifetime annuity
• Charity lump sum death benefits, which remain tax-free even where the member was over 75

And crucially, the existing spouse and civil partner exemption is unaffected. Anything passing to a spouse or civil partner who is a long-term UK resident remains free of Inheritance Tax, pension or otherwise. The first death in a couple, in most cases, still won’t trigger a bill on pension wealth.

Why this changes the maths, not just the mechanics

The reason this matters isn’t only the tax itself – it’s that it removes a planning assumption a lot of retirement income strategies have quietly relied on. If your pension was, in effect, the most tax-efficient asset to leave untouched and pass on, then drawing income from ISAs, general investment accounts or savings first – and leaving the pension until last, or not touching it at all – made sense. From April 2027, that pot is no longer shielded from IHT once it forms part of your estate. The relative tax efficiency of each asset class in your estate has shifted, and that’s worth revisiting even if nothing else about your circumstances has changed.

This is the heart of the “one tax change, whole plan” point: retirement income planning and estate planning have always been connected, but the pension’s IHT-free status let many people treat them almost separately. That separation is harder to justify now.

What’s worth reviewing – without jumping to conclusions

The order you draw from your assets. If part of the reason you were minimising pension withdrawals was to preserve IHT-free wealth for your family, that specific rationale is weaker post-2027. It doesn’t automatically mean you should spend your pension faster – but the trade-off between drawing pension income now (which may carry an income tax cost) versus preserving it for later (which may now carry an IHT cost as well) deserves a fresh look, ideally modelled against your actual numbers rather than assumed.

Your wider estate position. The standard nil-rate band remains £325,000 per person, and the residence nil-rate band up to £175,000 where a home passes to direct descendants – both frozen, with the government having confirmed a further freeze taking the standard thresholds through to April 2031. Adding pension wealth into an estate that was previously close to or under these thresholds could tip it into taxable territory for the first time. It’s worth having your total estate value – property, investments, savings and now pensions – recalculated rather than assuming last year’s position still holds.

Gifting, sensibly. Lifetime gifting remains one of the more established ways to manage a growing IHT exposure, whether through the annual exemption, gifts out of normal expenditure from income, or larger gifts that fall outside your estate after seven years if you survive them. Pension withdrawals used to fund gifts don’t become IHT-free simply because the money came from a pension – but using pension income (rather than preserving pension capital) to make gifts during your lifetime is a legitimate strategy some people may now consider more seriously. The income tax due on the withdrawal itself doesn’t disappear, so this needs modelling, not assuming.

Spouses and civil partners. Because transfers between spouses remain exempt, many couples will find the first death changes little in practice – pension wealth can typically still pass to a surviving spouse without an IHT charge. The exposure tends to build on the second death, when both nil-rate bands and both spouses’ pension wealth may combine into a single larger estate. This is where forward planning has the most value, and where reviewing nomination forms and expressions of wish (which still determine who receives death benefits, and therefore who bears any tax) matters more than ever.

How any tax is actually paid. From April 2027, personal representatives will be able to instruct pension scheme administrators to pay Inheritance Tax directly to HMRC out of the pension, via a new “pensions direct payment scheme,” rather than beneficiaries needing to fund a tax bill from other resources while waiting for probate. There’s also a facility for representatives to have up to 50% of a beneficiary’s pension benefit temporarily withheld while the tax position is resolved. These mechanisms don’t reduce the tax due, but they do address one of the more practical worries – being landed with an IHT bill on an asset you can’t yet access.

The risk of overcorrecting

It’s tempting, faced with a change like this, to restructure everything around minimising the eventual tax bill. That’s usually the wrong starting point. A pension is still one of the most tax-advantaged ways to save for your own retirement income – tax relief on the way in, tax-efficient growth, and a tax-free lump sum still available on drawdown, subject to your allowance. Spending it down faster than your retirement actually requires, purely to get ahead of a potential IHT charge on money you might not have spent anyway, can leave you short later in life or overly reliant on other assets that may themselves be more exposed to market risk, care costs, or your own change of circumstances.

The right question isn’t “how do I avoid this tax,” but “does this change alter the order in which I should be drawing on my assets, given everything else about my situation.” For some people, with modest estates well under the combined thresholds, the honest answer will be: not much. For others, particularly those with larger pension pots, a paid-off home, and a clear intention to pass wealth to the next generation, it may justify a genuine rethink of drawdown strategy, gifting and beneficiary nominations together.

Where this leaves you

The 2027 changes don’t make pensions a poor choice for retirement saving – they remove one specific advantage that applied after you no longer needed the money. Whether that changes your own approach depends on the shape of your whole estate, not the pension in isolation: your spouse’s position, your other assets, your intended beneficiaries, and how much of your wealth you actually expect to leave unspent.

This is exactly where retirement income planning and estate planning need to sit in the same conversation rather than two separate ones. At Questa, that’s the combination we bring together – reviewing how your pension, your wider assets and your estate plans work as a single strategy, so any changes you make are a considered response to the new rules rather than a reaction to them.

This article is for general information and does not constitute personal financial or tax advice. Inheritance Tax rules are complex and depend on individual circumstances; please speak to a qualified adviser before making decisions based on the above.