Pension and Inheritance Changes Are Prompting Joined-Up Protection Reviews

Pension inheritance tax changes: could life insurance help families prepare for 2027?

Changes to the inheritance-tax treatment of pensions from 6 April 2027 are prompting some families to take a fresh look at estate planning — and at whether life insurance could help provide money to meet a future tax bill.

Under legislation contained in Finance Act 2026, most unused pension funds and pension death benefits will be included in the value of a deceased person's estate for inheritance-tax purposes where the pension member dies on or after 6 April 2027.

That represents an important change for families who have previously regarded pension wealth as sitting largely outside the estate for IHT.

It does not, however, mean that everybody with a pension suddenly needs life insurance.

The starting point is to establish whether an inheritance-tax liability is likely at all.

What is changing for pensions in April 2027?

Under the existing system, many unused pension funds held within discretionary pension arrangements can usually pass to beneficiaries without being included in the deceased person's estate for inheritance tax.

From 6 April 2027, most unused pension funds and pension death benefits will instead be taken into account when calculating the value of the estate.

There are important exceptions.

Death-in-service benefits payable from registered pension schemes are being kept outside the new rules, while existing inheritance-tax exemptions for assets passing to a spouse, civil partner or qualifying charity continue to apply.

HMRC estimates that most estates will still have no inheritance-tax liability after the reform.

However, it expects some estates that would previously have paid no IHT to become liable, while others may face a larger bill once pension wealth is taken into account.

That makes the change particularly relevant to households with significant pension savings alongside property, investments and other assets.

Work out whether there is actually an inheritance-tax problem first

Life insurance should not be the first calculation.

The estate should be.

Inheritance tax is normally assessed after relevant exemptions, allowances and reliefs have been taken into account.

The standard nil-rate band is currently £325,000, while an additional residence nil-rate band of up to £175,000 may be available where a qualifying home passes to direct descendants. Unused allowances may also be transferable between spouses or civil partners in appropriate circumstances.

The position can become more complicated where the estate contains substantial property wealth, business interests, agricultural assets, lifetime gifts or trusts.

This is why a headline such as:

"Your pension will be subject to inheritance tax from 2027"

can be misleading.

The pension is becoming part of the wider IHT calculation. Whether tax is actually payable depends on the value and structure of the whole estate.

Our guide to how life insurance payouts affect inheritance tax explains how insurance itself can interact with the estate and why the way a policy is structured matters.

Life insurance does not make the inheritance-tax bill disappear

This is an important distinction.

Life insurance does not normally remove inheritance tax due on a house, investments, pension funds or other assets.

Instead, it can provide cash when somebody dies.

That cash can potentially give beneficiaries or trustees funds with which to deal with an inheritance-tax liability without immediately having to sell other assets.

For example, imagine an estate is expected to generate a £150,000 inheritance-tax bill.

A suitably arranged £150,000 life insurance policy does not erase that £150,000 tax liability.

Instead, the intention might be for the policy to provide £150,000 of liquidity so that beneficiaries have money available to help meet it.

Our guide to what life insurance actually pays out for explains why the policy provides money rather than prescribing exactly how the eventual payout must be spent.

Term insurance and a permanent inheritance-tax liability are different things

The length of the policy matters enormously in estate planning.

Ordinary term life insurance runs for a fixed period.

Someone might take £200,000 of cover for 20 or 25 years, for example. If they die during that period and the claim is valid, the policy pays out.

If they survive beyond the end of the term, the cover normally ends.

That works well where the financial risk itself is temporary — such as a mortgage or children remaining financially dependent.

Inheritance tax can be different.

If an IHT liability is expected to remain for the rest of someone's life, taking out a policy that expires at age 75 may simply create a new problem if they live to 76.

Our guide to how long life insurance should last explains why the policy term should match the financial risk being protected.

Why whole-of-life insurance can be relevant

Whole-of-life insurance is designed differently.

Rather than covering somebody for a fixed 20 or 30 years, it is intended to remain in force until death, provided the policy conditions are met and the required premiums continue to be paid.

That can make whole-of-life insurance more relevant where the financial liability is expected to be permanent.

For example, somebody who expects their estate eventually to face a substantial inheritance-tax liability may consider arranging permanent cover intended to provide funds whenever death occurs.

But the greater certainty generally comes at a price.

Whole-of-life insurance can be considerably more expensive than ordinary term cover, particularly at older ages or where substantial cover is required.

Our Life Insurance Explained section looks at the different types of life cover and why the appropriate structure depends on what the policy is intended to achieve.

Putting the policy in trust can be crucial

If life insurance is being arranged specifically to provide money towards an inheritance-tax liability, policy ownership becomes extremely important.

A life insurance payout is not automatically outside the estate.

If the policy is owned personally and the proceeds fall into the deceased person's estate, the insurance payout itself can potentially increase the value being considered for inheritance tax.

That can undermine part of the reason for arranging the insurance in the first place.

One approach commonly considered is writing the life insurance policy in an appropriate trust.

When structured correctly, the payout can usually be made to the trustees rather than forming part of the policyholder's estate.

Our detailed guide to writing life insurance in trust explains how trustees, beneficiaries and policy ownership work.

Trusts should not be treated simply as a box to tick on an insurance form.

They are legal arrangements.

The type of trust, trustees selected, beneficiaries, premiums and wider estate-planning circumstances can all matter, particularly where large sums or complex families are involved.

Who actually receives the money?

This is another area in which assumptions can cause problems.

A life insurance payout does not automatically go to someone's "next of kin".

Depending on how the policy has been established, the proceeds might be paid to trustees, beneficiaries, the deceased's estate or another party with rights under the policy.

Our guide to who gets the life insurance payout explains the differences between policy ownership, beneficiaries, trusts, wills and estates.

That becomes particularly important where the purpose of the policy is highly specific.

If £200,000 of cover has been arranged specifically to provide liquidity for a future inheritance-tax bill, the family needs to understand who will actually control that £200,000 when the policy pays.

The insurance policy, trust, will and wider estate plan therefore need to make sense together.

Pension nominations still matter

The 2027 changes do not make pension nominations irrelevant.

People should still review who they have nominated to receive pension death benefits and make sure those nominations reflect their current wishes.

Marriage, divorce, separation, new children and deaths within the family can all leave old nomination forms out of date.

However, a pension nomination and a life insurance beneficiary arrangement are separate things.

Likewise, neither should be considered in isolation from the person's will and wider estate.

The 2027 reform is therefore a useful reason to review the whole arrangement rather than simply buying an additional insurance policy.

Affordability over decades matters

There is another significant problem with using life insurance for estate planning: the policy may need to remain affordable for the rest of the person's life.

A policy that looks manageable at 55 could potentially be maintained for another 30 or 40 years.

Guaranteed premiums can provide greater certainty about future costs.

Some other arrangements may contain reviewable premiums or investment assumptions that can affect what has to be paid later.

The precise structure needs to be understood before relying on the policy as part of a long-term estate plan.

If the premiums eventually become unaffordable and the policy lapses, the intended inheritance-tax funding may disappear despite many years of previous payments.

Age also has a major effect on new life insurance pricing. Our guide to why life insurance becomes more expensive as you get older explains why postponing a decision can affect both cost and availability.

How much cover would actually be needed?

This should not be based simply on the current value of somebody's pension.

The relevant question is the estimated inheritance-tax shortfall after the entire estate has been considered.

That could change over time as property values, pension savings, investments, gifts and family circumstances change.

The amount of insurance may therefore need periodic review.

Someone who estimates a £100,000 liability today should not assume that £100,000 will necessarily remain the right amount in 10 or 20 years.

Equally, someone whose estate is likely to fall comfortably within available exemptions may discover that dedicated IHT life insurance is unnecessary.

Our guide to working out how much life insurance you need explains why cover should be linked to a defined financial need rather than an arbitrary round figure.

Do not forget the possibility of two taxes

The pension reforms also need to be considered alongside the existing income-tax rules applying to inherited pensions.

Inheritance tax and income tax are different taxes with different rules.

Depending on circumstances including the age of the person who dies, the type of pension benefit and how the beneficiary accesses it, income tax can potentially remain relevant after the estate's inheritance-tax position has been dealt with.

That makes pension and estate planning after 2027 more complicated than simply adding a pension balance to a property value and applying 40%.

Anyone with a substantial pension estate should therefore consider specialist financial, tax or legal advice rather than relying on a simple online calculation.

The 2027 change is a reason to review, not panic

For many households, the pension reforms will make no difference to the amount of inheritance tax eventually paid.

For others, particularly those with substantial property, pension and investment wealth, the change could materially increase the value of the estate brought into the IHT calculation.

That makes 6 April 2027 an important planning date, but not a reason to rush into buying insurance.

A sensible review should bring together the pension, property, investments, wills, nominations, trusts and existing life insurance.

Only then can a family identify whether there is a genuine tax-liquidity problem and, if there is, how large it might be.

Life insurance can form part of that solution.

But it works best when the amount of cover is realistic, the premiums remain affordable, the policy lasts for as long as the liability exists and the proceeds are structured to reach the intended people without inadvertently increasing the estate they were meant to help protect.

For anyone reviewing an existing policy as part of that process, our guide to whether life insurance can be increased or changed later explains why changing old cover can sometimes require fresh underwriting.

The objective is not simply to insure against a tax bill.

It is to create an estate plan that still works when the money eventually needs to reach the family.

Sources: HM Revenue & Customs, Inheritance Tax on Pensions: Technical Note, updated 29 May 2026; HM Revenue & Customs, Inheritance Tax on Pensions: Technical Note 2, 27 August 2026; HMRC inheritance-tax threshold guidance.