If you have spent any time reading about legacy planning, you have likely heard a comforting refrain that pensions sit outside the inheritance tax net. For years that was broadly true for most defined contribution arrangements when benefits were paid at the scheme’s discretion. The landscape is now shifting. From April 6, 2027, most unused pension funds and certain death benefits will be treated as part of the member’s estate for inheritance tax purposes. The change was announced at the Autumn Budget 2024, set out in a technical consultation, and confirmed in the government’s response published in July 2025. The headline is simple. Pension wealth that once floated to beneficiaries free of inheritance tax will, in many cases, be counted in the estate and tested against the standard thresholds. The government’s own modelling suggests that in 2027 to 2028 about 10,500 estates will face inheritance tax for the first time because of this, and around 38,500 will pay more than under the old rules.
Public interest has followed the policy through the summer. On September 1, 2025, a BBC consumer segment explained how unused pensions would be drawn into the inheritance tax calculation and why people were already considering lifetime gifts to manage exposure. It captured the tone of many conversations now happening around kitchen tables, where families are weighing student fees, house deposits, and the right time to help while rules are clear.
It helps to restate the present framework before layering in the pension change. The main inheritance tax threshold, known as the nil-rate band, is £325,000 per person. A separate residence nil-rate band of up to £175,000 applies when a home is left to direct descendants, and together these can shelter up to £500,000 per individual, or up to £1 million for many couples when transferable allowances are used. Both bands are frozen until April 2030, which matters because static thresholds pull more estates into scope as asset values rise. The standard inheritance tax rate is 40 percent on the portion above the available allowances.
Under the 2027 reform, the long-standing distinction between discretionary and non-discretionary pension death benefits no longer keeps most unspent pots outside the estate. Unused funds and many death benefits from registered pension schemes will be added to the estate, then tested against the same thresholds. One important carve-out stands. Death in service lump sums from registered pension schemes are confirmed to be out of scope from April 6, 2027, which ensures consistent treatment for those specific benefits. The government also changed its original plan for who must report and pay the tax that relates to pensions. Rather than pension scheme administrators, personal representatives for the estate will be responsible for reporting and paying any inheritance tax that arises on unused pension funds and death benefits. This aligns the process with how other estate assets are handled and should feel more familiar to executors.
Some readers will ask whether the spouse or civil partner exemption still operates as before. It does. Transfers to a UK-resident spouse or civil partner remain exempt from inheritance tax, both during life and on death, and that exemption continues to apply in the background to these pension changes. The broader system still allows an estate to pay a reduced rate of 36 percent if at least 10 percent of the net estate goes to charity, and gifts to qualifying charities remain free of inheritance tax altogether. Those two facts can be powerful when re-drafting wills in light of the pension reform.
What all this means in practice is that the order in which you draw down assets may need a fresh look. Many planners previously favoured spending regular savings and taxable investments first, then leaving pension wealth sheltered and passing it down outside the inheritance tax net. The 2027 ruleflip removes much of that advantage. For families with significant pension wealth, it may be sensible to consider a drawdown strategy that uses a portion of pension income earlier, especially where other assets would otherwise compound the estate value above the nil-rate bands. It also makes beneficiary nominations and expression of wishes letters worth revisiting, because the value that reaches your heirs will now be affected by inheritance tax in a way it was not before. For context on why savers have been acting early, note that withdrawals of tax-free pension cash jumped in the most recent tax year as people sought to lock in known allowances amid talk of reforms. The message is not to panic or drain pensions into less efficient wrappers, but to plan with the confirmed rules rather than yesterday’s folklore.
The second major pillar of planning is gifting. Gifts made during your lifetime can remove value from your estate, but the rules have edges that deserve care. There is an annual exemption of £3,000 per donor per tax year. If unused in one year, it can be carried forward for one year only, allowing up to £6,000 to be applied in the next year. In addition, you can make any number of small gifts up to £250 to different individuals each year, provided you have not used another allowance on the same person. Wedding and civil partnership gifts have their own ceilings, with larger limits for your own children and lower limits for others. These figures have been with us for years and have not kept pace with inflation, so their power is real but modest.
Larger outright gifts fall under the seven-year rule. Gifts that are not covered by specific exemptions are potentially exempt transfers. If you survive seven years from the date of the gift, that transfer becomes fully exempt. If you die within seven years, the gift is brought back into the inheritance tax calculation. The tax charge for gifts made within three years of death can be at the full 40 percent rate, and taper relief then reduces the rate on a sliding scale for gifts made earlier in the seven-year window. The result is intuitive. The earlier you gift, the more likely that value stands outside the estate when it matters.
Many people have heard of the seven-year rule but fewer use one of the most effective and flexible exemptions, namely the exemption for normal expenditure out of income. The law allows you to make regular gifts from your surplus income, provided the pattern is demonstrable and you retain enough income to maintain your usual standard of living. There is no statutory monetary cap on this exemption, which is why advisers value it so highly when used carefully. Good record-keeping is the price of admission. HMRC’s own manual stresses that gifts must form part of normal expenditure, be made out of income, and leave enough to live on. Keeping a simple schedule of income, regular outgoings, and the dates and recipients of gifts will make an executor’s life easier and support a claim after death. In practice, families use this route to pay school or university fees for grandchildren, to cover insurance premiums on policies written in trust, or to make regular help-with-bills payments to adult children. The exemption applies when those payments are part of a pattern and clearly funded from income rather than capital.
Documentation ties the planning together. Executors must account for lifetime gifts when working out any tax due, and clear records shorten a difficult process. HMRC’s IHT403 schedule provides a template that many people use during life to log gifts and build the evidence for any claim to the income exemption. It also reminds families that if tax is due on gifts made within seven years of death, the recipient can become liable for the tax on those gifts. That liability usually arises only after the estate’s own funds and allowances have been applied, but it underlines why accurate records help both executors and beneficiaries avoid surprises.
People often ask who pays which bill when gifting and estates overlap. The broad rule is that inheritance tax due on the estate as a whole is paid by the estate and handled by the executor. Where tax is due on chargeable gifts made within seven years of death and those gifts use up the available nil-rate band, the recipient can be liable for the tax on those gifts. The law sets out the order and priority for collection. That framework matters more as the pension reform comes in, because a pension that once created no inheritance tax bill could now absorb allowances that might otherwise have cleared lifetime gifts. The practical takeaway is coordination. Make sure your executor knows about significant lifetime transfers, and keep the paperwork in the same place as your will, trust deeds, and pension nominations.
There are still ways to reduce the rate where a tax charge will arise. If at least 10 percent of the net estate passes to charity, the rate on the remainder can drop from 40 percent to 36 percent. For some estates that careful calibration can leave more for loved ones while also supporting causes that matter. It is well worth asking your solicitor to run the numbers with your will draft, because the thresholds and calculations for the 10 percent test have components that need precise wording.
Finally, remember specific exceptions within the new pension framework. Death in service lump sums from registered schemes remain out of scope from April 2027. That clarity is deliberate and provides comfort for families relying on employer-provided protection. At the same time, nothing here affects the basic spouse and civil partner exemption, which continues to shield transfers between partners. Put those pieces together with the frozen thresholds and you see the new picture. More estates will be pulled into the net not because families are wealthier than before, but because once-sheltered pension wealth now counts and the bands are fixed until 2030.
If you are thinking about what to actually do between now and April 2027, start by mapping your estate under the new rules rather than the old ones. Add your unspent pension funds to the rest of the estate and test it against £325,000 plus any residence nil-rate band you expect to claim. If your model shows a likely charge, consider whether spending a little more from the pension in retirement would both improve quality of life and reduce the taxable estate by 2027. Resist the temptation to pull cash out of a pension simply to sit in a taxable environment without purpose. Some savers rushed to take the 25 percent tax-free lump sum ahead of mooted changes only to wish they had left the money growing within the wrapper. If you do withdraw, give each pound a job, whether that is paying down a mortgage, funding a Lifetime ISA for a child, or supporting a defined investment plan.
Next, review your lifetime gifting strategy with the real exemptions that work. Use the annual £3,000 where it makes sense, keep the £250 small gift option in your back pocket for birthdays and thank-yous, and consider whether a standing order from surplus income could formalise regular help for a loved one while legitimately keeping those payments outside the estate. Write a short letter to the recipient that sets out your intention to make regular gifts from income and keep a simple spreadsheet of your monthly inflows and outflows. When life changes, update the note. Executors do not need glossy binders. They need enough contemporaneous evidence to show a pattern and to match it with the bank statements.
If philanthropy is part of your values, ask your adviser to check whether a 10 percent charitable legacy would reduce the rate for your estate from 40 percent to 36 percent and still leave more net value to non-charity beneficiaries. Families are using that lever more often because it aligns impact with efficiency. None of this replaces the need for a will that matches your wishes and for up-to-date pension nominations for each scheme you hold. Those two documents are the steering wheel and the brakes. They decide where value flows and how quickly the process moves when the time comes.
The bottom line has not changed. Good planning is about getting value to the right people at the right time and with the least friction. What has changed is that from April 2027, pensions join the list of assets that must be weighed inside the inheritance tax calculation. Build your plan with that reality in mind. Use the frozen thresholds wisely. Document regular gifts from income if you use that route. Keep clean records for all gifts. Revisit drawdown choices and beneficiary nominations. And if you want a single sentence to carry forward, carry this one. Under inheritance tax on pensions 2027 rules, unspent pension savings will count, so the families who take the time now to adjust course will be the ones whose beneficiaries feel the difference later.
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