If you have been relying on your pension as a way to pass on wealth to your family free of inheritance tax, the rules are about to change in a significant way. From April 2027, most unused pension funds will be brought into the scope of inheritance tax (IHT) for the first time.
There is still time to act, but the window is closing, and the planning decisions you make in the next twelve months could make a substantial difference to the financial legacy you leave behind.
What Is Changing?
Currently, most pension pots fall outside your estate for IHT purposes. This has long made the pension an exceptionally efficient vehicle for intergenerational wealth transfer – many financial planners have encouraged clients to draw from other savings first, preserving pension funds for their heirs. As things stand today, your beneficiaries can inherit your unused pension entirely free of inheritance tax.
That changes in April 2027. As confirmed in the Autumn Budget 2025, the Government will include most unspent pension pots in the value of an individual’s estate for IHT purposes. For estates already above the nil-rate band threshold of £325,000 (or £500,000 with the residence nil-rate band), this could mean a 40% tax charge on pension funds that would previously have passed on untouched.
Why This Matters
For decades, pension planning advice has been structured around one key principle: your pension is the last pot you draw from, because it is the most tax-efficient to pass on. Many people with significant pension savings have organised their drawdown strategies accordingly – spending ISAs and general savings accounts first, leaving the pension as an inheritance gift.
That logic is about to be turned on its head. According to analysis from the Morningstar UK personal finance team, the change is expected to have a substantial impact on tax planning, particularly for those who have accumulated meaningful pension savings. The pressure is not just about the pension itself, it interacts with other changes to dividend tax, frozen allowances, and rising National Insurance contributions to make the overall picture considerably more complex.
For business owners and directors, who often hold significant pension pots as part of a broader wealth strategy, the implications can be especially far-reaching.
Additional Changes to Consider
The pension IHT change does not arrive in isolation. The next two years bring a cluster of tax and savings reforms that together demand a fresh look at your overall financial plan:
Dividend tax rises (April 2026): From this April, the basic rate of dividend tax increases from 8.75% to 10.75%, with higher-rate taxpayers moving from 33.75% to 35.75%. If you hold investments outside a tax-efficient wrapper, you will feel this immediately.
Cash ISA allowance cut (April 2027): The annual cash ISA limit is being reduced from £20,000 to £12,000 for under-65s — another reason to reassess how you are structuring your savings.
Pension dashboards (October 2026): All pension schemes must be connected to the Government’s new pensions dashboards ecosystem by 31 October 2026, giving savers a full, consolidated picture of their pension entitlements for the first time. This will make it easier than ever to see exactly what you have and to plan accordingly.
You can read the Government’s full guidance on these changes at GOV.UK.
What Should You Be Doing Right Now?
The time to plan is now. Here are the key questions worth asking:
Have you reviewed your pension drawdown strategy? If you have been deferring pension income to preserve it for your heirs, that calculation needs revisiting. Depending on your overall estate position, it may now make more sense to draw from your pension earlier and use the proceeds in a different, tax-efficient structure.
Is your estate plan still fit for purpose? A will written five years ago may not reflect the new reality. If pension assets formed a core part of your intended legacy, it is worth revisiting the whole picture with an adviser.
Are your savings working as hard as they can? With dividend tax rising and the cash ISA limit tightening, there is renewed value in exploring offshore investment bonds, stocks and shares ISAs, and other tax-efficient wrappers that can help protect your wealth as the rules change.
Do you have a joined-up view of everything you own? The new pensions dashboards will help, but the best planning starts with a full, holistic view of your cash, investments and pension funds in one place.
A Complex Moment — But Also an Opportunity
It would be easy to read this as a story about things being taken away. But for those who plan well, it is also a moment of genuine opportunity. The clients who act early — who review their estates, reassess their drawdown strategies, and make thoughtful use of available tax-efficient structures will be in a far stronger position than those who wait. As the Pensions Commission’s interim report is expected to confirm this year, the landscape for retirement planning is shifting. Staying informed and getting the right independent advice has never mattered more.
At The Bateman Group, we have been helping individuals and families navigate exactly these kinds of changes since 1967. Our independent, whole-of-market approach means we have no product allegiances – only the goal of finding the right solution for you. If you would like to talk through how the April 2027 pension changes might affect your estate plan, we would be glad to help.
