Pensions and Inheritance Tax: What the April 2027 Changes Mean for Your Family

For many families, a pension has long felt like a safe harbour — money set aside for retirement that sits quietly outside the inheritance tax story. From April 2027, that assumption changes. If you or a loved one holds significant pension savings, this article explains what is happening, why it matters, and what practical steps are worth taking now.

The background: why pensions were different

Until now, most defined contribution pension funds — the kind where you or your employer pay into a pot that is invested on your behalf — have not formed part of your estate for inheritance tax (IHT) purposes. This was intentional: pensions were designed to fund retirement, not to pass wealth on, and the tax rules reflected that. As a result, many families quietly accumulated substantial pension savings that sat outside their IHT calculations entirely.

That position is changing. The Government has announced reforms that will bring pensions into scope for IHT on death, with the changes taking effect from April 2027. The practical effect is that estates which previously had little or no IHT exposure may now face a significant tax bill — and wills and financial plans made under the old rules may no longer work as intended.

Who is most likely to be affected?

You are most likely to feel the impact of these changes if you:

• have a defined contribution pension with a meaningful balance — particularly if it has been left to grow during retirement rather than drawn down fully;
• own a family home and have other savings or investments alongside a pension, so that your combined wealth exceeds the available tax-free allowances;
• made your will some years ago, at a time when pension assets were not expected to affect your IHT position; or
• have fixed cash gifts in your will — leaving a sum to a grandchild or a favourite charity — because the way IHT is funded can directly affect what beneficiaries actually receive.

Married couples and civil partners will often be insulated on the first death, because assets passing between spouses are generally exempt from IHT. But the second death — when the full combined estate passes to children or other beneficiaries — is where the new rules are most likely to bite.

Putting numbers to it: a worked illustration

The following examples use round figures to illustrate the potential impact. They are simplified for clarity and are not individual tax advice, as everyone’s position is different.

The allowances available on death

Most married couples can shelter a combined total of up to £1,000,000 from IHT, made up of:

These figures assume both allowances from the first spouse’s death have been transferred to the survivor. The RNRB is subject to its own conditions and begins to taper away on larger estates.

Example A: the position today (pension outside IHT)

Consider a family with the following assets on the second death:

Under current rules, no IHT arises at all. The family may reasonably assume their affairs are in order.

Example B: the position from April 2027 (pension included in IHT)

Using the same family, but now with the pension counted as part of the estate:

The key point

A family with no IHT bill today could face a £240,000 tax liability from April 2027 — simply because the pension is now counted alongside the rest of the estate. Nothing about their circumstances has changed, other than the law.

Why your will may need to be looked at

The change in the IHT calculation is only part of the picture. How a will is drafted determines who bears the cost of that tax — and that is where many families could be caught out.

Fixed cash legacies

Many wills include gifts of a specific sum: “£50,000 to my nephew, £50,000 to my goddaughter, and the remainder to my children.” On the face of it, the nephew and goddaughter receive a guaranteed amount. But whether those gifts are paid before or after IHT, and how the will’s tax provisions interact with the new pension-inclusive calculation, can significantly affect what each person actually receives.

If IHT is now payable where it was not before, the residue — what passes to the children — is reduced. In some cases the drafting may mean the fixed gift recipients bear some of the tax too. Either way, the distribution may look very different from what was intended when the will was made.

Nil Rate Band trusts and formula clauses

Over the past two decades, it was common practice to include a Nil Rate Band trust in a will — a structure that ringfenced the tax-free threshold on the first death to make use of it efficiently. Many wills also include ‘formula clauses’ that calculate a gift by reference to the available Nil Rate Band.

Where the estate now includes pension assets, both the tax calculation and the amounts flowing through these structures can change. A formula clause written in 2010 may produce a very different outcome — and a different distribution — in a post-2027 world.

Charitable giving: opportunity, complexity, and a hidden cash problem

Charitable giving and IHT interact in a way that becomes both more powerful and more complicated once pension assets are in the picture. There are three distinct issues worth understanding.

The 10% rule and the reduced IHT rate

If a will leaves at least 10% of the ‘baseline amount’ — broadly, the taxable estate above the available nil rate bands — to qualifying charities, the IHT rate on the remainder of the estate reduces from 40% to 36%. This is a meaningful concession, and one that many families overlook.

It is important to be clear about what this rule does and does not do. It does not reduce the total outflow below what would have been paid in tax alone — the combined cost of charity plus IHT will always be slightly higher than IHT without charity. But it means that a meaningful charitable gift costs the family far less than its face value, because much of the gift is effectively funded by the IHT saving. That is the right way to think about it.

Using our post-April 2027 figures, where the taxable amount is £600,000:

The charity receives £60,000, but the family’s actual net cost of making that gift is only £14,400. For every £1 the charity receives, the family contributes just 24 pence; the remaining 76 pence is recovered through the reduction in IHT. For families with a genuine charitable intention, this makes the 10% legacy a highly efficient mechanism — far more so than making the same gift informally during lifetime or outside the will.

A word of caution if your will already includes a charitable legacy

April 2027 also affects wills that already contain a fixed charitable gift. Because the pension is now counted in the estate, the baseline figure against which the 10% threshold is measured is larger than before. A fixed charitable legacy that was the right size under the old rules may now fall short of the 10% minimum — and miss the reduced rate entirely.

For example, a will leaving £20,000 to charity made sense when there was no taxable estate and no IHT in play. Post-2027, with a taxable amount of £600,000, the 10% threshold requires a gift of at least £60,000. The £20,000 legacy falls short: it does not trigger the reduced rate, so IHT still falls due at 40%, and the charity still receives less than it could. The will has not kept pace with the change in the law.

If your will contains a fixed charitable sum, it is worth checking whether it would still meet the 10% threshold once pension assets are brought into the calculation — and whether it should be expressed as a percentage of the estate rather than a fixed amount, so that it adjusts automatically.

The liquidity problem: pensions do not pass under the will

There is a further issue that sits underneath all of this, and it is one that can come as a genuine surprise to families.

Pension funds are not governed by your will. They pass according to the nomination you have made with your pension provider — typically to a surviving spouse, children, or a trust nominated for that purpose. This means that even though the pension is now counted as part of the estate for IHT purposes, the money itself does not automatically flow into the estate to help pay the tax bill.

The IHT liability is instead allocated pro-rata across all parts of the estate — including the pension. Each component bears a share of the tax in proportion to its value. In our example, with a total estate of £1,600,000 and IHT of £240,000, the allocation works as follows:

In principle, the pension bears half the IHT bill — £120,000. The non-pension estate bears the other £120,000, split between the house (£90,000) and savings (£30,000). But here is the problem: HMRC requires the IHT attributable to the estate to be paid before probate is granted. The pension passes separately to the nominated beneficiaries and is not available to the executors for this purpose. The executors must fund the estate’s £120,000 share from the assets they actually hold.

Where the cash pressure falls

The executors hold: house £600,000 and savings £200,000.

Demands on those assets before residue can be distributed:

• Estate’s pro-rata IHT share:  £120,000
• Fixed legacies (e.g. £50,000 to a nephew, £50,000 to a godchild):  £100,000
• Total:  £220,000

Liquid savings available: £200,000

Shortfall: £20,000

The executors are £20,000 short before a single penny reaches the residuary beneficiaries — and the only remaining asset is the family home.

The result is that executors may be forced to sell the family home, or arrange short-term bridging finance, simply to meet a tax liability that is partly attributable to pension wealth that has already passed directly to the nominated beneficiaries outside the estate entirely.

This is not a reason to avoid charitable giving or to ignore the reduced rate — but it is a strong reason to review the funding mechanics of your will alongside any financial planning around pension nominations, life assurance, and estate liquidity. The two conversations, often held separately, now need to be joined up.

What should you do now?

The April 2027 date is close enough that early action is sensible. We would suggest the following questions as a starting point:

Is my Will up to date?

If it was drafted more than a few years ago, it may not reflect the new IHT landscape. A review need not be a complete rewrite, but it should check that the distribution and tax provisions still work as you intend.

Does my Will include fixed cash gifts?

If so, it is worth confirming who bears the IHT if a bill arises, and whether the amounts remain appropriate.

How large is my pension pot relative to my other assets?

If the pension is a significant part of your wealth, it should now be treated as a core part of your estate planning — not a separate matter for your financial adviser alone.

Have I discussed pension nominations recently?

Pension funds are not governed by your will — they pass according to your nomination with the pension provider. This interplay between the nomination and your will becomes more important when pensions are part of the IHT picture.

Should I revisit any trust structures in my Will?

If your will includes a Nil Rate Band trust, a discretionary trust, or an interest in possession arrangement, the impact of the new rules on those structures is worth checking.

How we can help

These changes are material, and the interaction between pension rules, IHT, and will drafting can be genuinely complex. The examples above are illustrative — individual circumstances vary considerably, and the right course of action depends on your specific family, asset profile, and objectives.

At Richard Nelson LLP, our wills & probate team advises families on wills, trusts, and estate planning, working alongside financial advisers where pension and investment considerations are in play.

If you would like to review your will or discuss how the April 2027 changes affect your estate planning, we would be glad to help. Please contact us to arrange an initial conversation with a member of our private client team.

This article is intended as general guidance only and does not constitute legal or tax advice. The examples used are illustrative and simplified. You should seek professional advice tailored to your own circumstances before taking any action. Tax rules are subject to change.