Your house, your pension and your family
From 6 April 2027, most unused pensions will count towards your estate for inheritance tax (IHT). If your plan relies on passing your pension on tax free, now is the time to review it.
“My house is for my retirement; my pension is for the kids.” The idea was simple. Pensions sat outside the IHT estate, so it made sense to spend other assets first, including the equity in the family home, and leave the pension untouched for the next generation.
That approach has worked well for many years. From April 2027, it no longer holds up in the same way.
What changes on 6 April 2027
On death, most unused pension funds and pension death benefits will be added to the estate for IHT.
Spouse or civil partner: a pension passing to them stays exempt, the same as any other transfer between spouses.
Children and other family: if your Expression of Wishes names them, the pension value goes into the IHT calculation. (Have you filled yours in?)
Who deals with it: your executors calculate the tax. The rules allow the tax to be paid out of the pension itself before it is passed on, so the rest of the estate does not have to find the cash.
The double tax trap
If you die after age 75, your pension could be hit by IHT and then by income tax when your family draws it. In the worst cases, very little is left.
The income tax rules for inherited pensions are not changing:
Death before 75: beneficiaries pay no income tax on what they draw.
Death after 75: beneficiaries pay income tax at their own marginal rate.
Add 40% IHT on top and the numbers stack up quickly. The residence nil rate band (up to £175,000 per person) also starts to taper away once an estate goes over £2m. Bringing a pension into the estate for the first time can push it past that line.
| What happens | IHT on pension | Income tax for beneficiary | Total lost per £100 |
|---|---|---|---|
| Death after 75, higher-rate beneficiary | 40% | 40% | £64 |
| Death after 75, additional-rate beneficiary | 40% | 45% | £67 |
| Estate in the £2m taper band, higher-rate beneficiary | Up to 60% | 40% | Up to £76 |
What to consider now
Pensions are still one of the best ways to save for retirement, and tax should not drive every decision. But these three points are worth a look.
1. Take the tax free lump sum. Leaving it in the pension means it could fall into the double tax trap. Taking it moves it into your normal estate and removes the income tax charge for your beneficiaries. This matters most if you are over or close to 75.
- Trade off: any income or growth on that cash becomes taxable in your name.
2. Gift the lump sum if you do not need it. Withdrawing the tax free cash and giving some or all of it away starts the seven year IHT clock on that gift.
3. Gift surplus pension income. If your other income already covers your lifestyle, you can draw pension income and give it away regularly. Regular gifts from surplus income can qualify for the normal expenditure out of income exemption, which takes them out of your estate straight away.
- Watch out: you must keep detailed records proving the gifts come from income you do not need.
Disclaimer: This post is for general information only and does not constitute financial, tax or legal advice. Inheritance Tax rules may change; seek professional advice based on your individual circumstances.
