Pensions & Inheritance Tax from 2027

Understanding the New Rules for Unused Pension Funds

A change that could affect more families than you might think

For years, one of the most common pieces of retirement advice was surprisingly simple:

Spend your savings. Spend your ISAs. Leave your pension until last.

Why? Because, in many cases, your pension sat outside your estate for Inheritance Tax (IHT) purposes. It could continue growing tax efficiently during your lifetime before passing to your loved ones on your death. From 6 April 2027, that position changes.

From 6 April 2027, most unused pension funds and pension death benefits will generally be included when calculating the value of an estate for Inheritance Tax purposes. While this won’t affect everyone, it does mean many families should review their retirement and estate planning before the new rules take effect.

The headlines have understandably focused on “pensions becoming subject to Inheritance Tax”. But, as is often the case with tax legislation, the reality is more nuanced. For some families, very little will change. For others, the financial impact could be significant. The important thing isn’t reacting to newspaper headlines. It’s understanding what the changes mean for you and your family.

At a Glance

Before 6 April 2027	From 6 April 2027
Most unused pensions were generally outside your estate for IHT.	Most unused pensions will usually form part of your estate for IHT purposes.
Many people preserved pensions to pass on to the next generation.	Retirement income strategies may need reviewing.
Estate planning often focused on non-pension assets.	Pension planning and estate planning become much more closely linked.

Why has the Government changed the rules?

Whenever tax rules change, one of the first questions people ask is: “Why?”

The Government’s view is that pensions have increasingly been used as a vehicle for passing wealth between generations rather than simply providing an income in retirement.

As pension freedoms became established, many retirees quite sensibly chose to leave their pension invested while spending other assets first. The pension continued to benefit from a tax efficient environment and, in many cases, remained outside the scope of Inheritance Tax.

The Government believes this created an inconsistency between pensions and other assets held within an estate. As a result, the Finance Act 2026 brings most unused pension funds and pension death benefits within the scope of Inheritance Tax for deaths occurring on or after 6 April 2027.

Whether you agree with the policy or not is almost beside the point.

The rules are changing. Good financial planning needs to change with them.

Fathom's View

One of the biggest misconceptions we’ve heard since these changes were announced is:

``My pension will lose 40% to tax.``

For many people, that simply won’t be true. Inheritance Tax depends on the value of your overall estate, who inherits your assets, and the reliefs and exemptions available. That’s why it’s important not to make decisions based on headlines alone.

Should you be worried?

The simple answer is… Maybe.. Maybe not..

One of the biggest misconceptions surrounding the new rules is that everyone with a pension will suddenly face a 40% Inheritance Tax bill. Fortunately, that’s not the case.

Inheritance Tax has always been based on the value of your estate after taking account of the available allowances, exemptions and reliefs. The new legislation doesn’t change those principles it changes what is included when your estate is valued. From April 2027, most unused pension funds will generally be added to that calculation.

For some people, that won’t change anything. For others, it could make a considerable difference.

You may want to review your plans if...

The new rules are most likely to affect people who have:

Built up significant pension savings over many years.
Property wealth as well as pension wealth.
ISAs, investment portfolios or other savings.
Business assets.
Children or grandchildren who hope to benefit from their estate.

It’s worth remembering that many people now have several pensions accumulated during their working lives.

A workplace pension from a previous employer.

A personal pension.

A SIPP.

Perhaps even a pension that has never been consolidated.

Individually, they might not seem significant. Collectively, they can represent one of the largest assets you own.

A simple example

Let’s imagine David and Sarah. They’re both in their mid-sixties and recently retired.

They own:

A family home worth £700,000
ISAs and savings worth £250,000
Pension funds worth £850,000

A few years ago, their pension may not have featured prominently in their Inheritance Tax planning because it generally sat outside of their estate. From April 2027, that pension is likely to become part of the calculation. That doesn’t automatically mean they’ll pay more tax. But it does mean the conversation has changed. Currently, they have a combined IHT allowance of £1 million (thanks to their standard nil rate bands and property allowances).

Note: The £1 million allowance assumes this is the second death, the home passes to direct descendants, and the full transferable nil-rate bands and residence nil-rate bands are available.

Before April 2027: Their taxable estate is valued at £950,000 (their home and savings, as the pension sits safely outside). Because this is under their £1 million limit, their IHT bill is £0.

From April 2027: Their £850,000 pension is dragged into the calculation. Their estate is suddenly valued at £1.8 million. Even after applying their £1 million in allowances, they now face a 40% tax bill on the remaining £800,000 amounting to an unexpected £320,000 IHT bill when the second partner passes away (Pension benefits passing to an exempt beneficiary, such as a spouse, civil partner or qualifying charity, may remain exempt from IHT, subject to the relevant conditions).

This doesn’t mean they are powerless. But it does mean the conversation has fundamentally changed. Instead of asking:

``How much is our estate worth?``

They’re now asking:

``How much is our estate worth including our pensions?``

It’s a subtle difference. But potentially an important one.

It's not just about tax

When most people hear the words Inheritance Tax, they naturally focus on the amount of tax that might be payable. In reality, good estate planning has never been just about reducing tax.

It’s about ensuring your wealth passes to the people you choose, in the most efficient way possible.

For some families, the answer may be: “You don’t need to change anything.”

For others, it may involve reviewing:

How retirement income is taken,
Whether pensions are still the right assets to preserve,
Gifting strategies,
Beneficiary nominations, and
The wider structure of their estate.

Every family is different. That’s why good planning starts with understanding your own circumstances, not somebody else’s headline.

Fathom Insight

We’ve already started talking to clients about these changes. Not because we’re encouraging everyone to take action. Quite the opposite. Sometimes, the most valuable outcome of a review is discovering that your existing plan still works perfectly well. Sometimes the best outcome isn’t paying less tax. It’s discovering your existing plan still works.

One question we’re hearing more than any other…

``Should I start taking more money out of my pension before April 2027?``

It’s a perfectly sensible question. The honest answer is …

... Not necessarily.

For many years, the conventional wisdom was to preserve your pension for as long as possible. The new rules certainly mean that strategy deserves another look. But withdrawing large sums simply to avoid a potential Inheritance Tax bill could create a very different problem than an unnecessary Income Tax bill. That’s why decisions about pensions should never be made in isolation. They should always form part of a wider financial plan.

Most people don’t spend years building their pension because they’re trying to save tax. They do it because they want financial security for themselves and the people they love. That hasn’t changed, the tax rules have!

Fathom’s view

Tax legislation changes, your goals usually don’t. The important thing isn’t reacting to every Budget announcement. It’s making sure your financial plan continues to work for you and your family.

The Bottom Line: The issues outlined won’t affect every family. But if you think these changes could affect you, now is the time to review your plans, understand your options and make informed decisions, not when the rules come into force.

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