Pension Inheritance Tax Changes From April 2027 Prompt Estate Planning Reviews
Published: 19 September 2026
Families with significant pension savings are being encouraged to review their estate planning ahead of a major change to inheritance tax from April 2027.
From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased person's estate for inheritance tax purposes.
The reform was originally announced at the Autumn Budget 2024 and has now been legislated through Finance Act 2026. HMRC has continued publishing technical information during 2026 explaining how the new system is expected to work in practice.
The change could be particularly significant for people who have deliberately preserved pension savings with the intention of passing them to children or other beneficiaries.
It does not, however, mean every inherited pension will face inheritance tax.
The overall value of the estate, available allowances and exemptions, who inherits the pension and the particular type of pension benefit will all matter.
What changes from April 2027?
Under the current system, many discretionary pension death benefits can normally sit outside a person's estate for inheritance-tax purposes.
From 6 April 2027, that position changes.
Most unused pension funds and pension death benefits will be included when calculating the value of the deceased person's estate.
This means a pension that previously sat outside the inheritance-tax calculation could push an estate above the available tax-free thresholds or increase the amount of inheritance tax due.
There are important exceptions.
Death-in-service benefits paid from registered pension schemes will remain outside the estate for inheritance-tax purposes. Certain dependant's scheme pensions are also excluded.
Spouse and civil-partner exemptions continue to be relevant, so a pension passing to a surviving spouse or civil partner may produce a very different tax result from one passing directly to children.
How many estates could be affected?
The Government has said most estates are still expected to pay no inheritance tax after the change.
Its estimates suggest that, among estates with inheritable pension wealth in 2027/28, around 10,500 estates could become liable for inheritance tax that would not previously have paid it.
A further 38,500 estates could pay more inheritance tax than under the current rules.
Those are Government estimates rather than predictions for individual families, and behaviour may change as people adjust their retirement and estate-planning arrangements before the new rules take effect.
But they illustrate why pensions are becoming a more important part of inheritance-tax planning.
Why pensions have become an estate-planning issue
For many years, pensions have had an unusual position within estate planning.
Someone might choose to spend money held in ISAs, investments or savings while leaving as much as possible inside a pension.
One reason was that unused pension funds could often be passed on outside the inheritance-tax estate.
That distinction becomes much less significant from April 2027.
It does not necessarily mean people should start withdrawing pensions simply to reduce an inheritance-tax bill. Taking money from a pension can create income-tax consequences and may simply move the money from one part of the estate to another.
The change instead means that the old assumption — “leave the pension until last because it sits outside the estate” — may need to be reconsidered.
Professional pension and tax advice can be particularly important before changing withdrawal or gifting strategies.
Where life insurance may fit
The pension reform is also prompting renewed discussion about the role life insurance can play in inheritance-tax planning.
Some families use whole-of-life insurance to provide money towards a future inheritance-tax liability.
The aim is not to make the tax disappear.
Instead, the policy can potentially provide liquidity when the tax becomes due.
For example, an estate may contain substantial value in:
- A family home
- Investment properties
- Business assets
- Investments
- Pension wealth
The beneficiaries may ultimately inherit considerable wealth but still face difficulty finding cash quickly enough to meet an inheritance-tax bill.
A life insurance payout could potentially provide money towards that liability, reducing the need to sell property or investments quickly.
Our guide to how life insurance payouts can affect inheritance tax explains why the structure of the policy matters as much as the amount of cover.
The policy may need to sit outside the estate
Using life insurance to help fund an inheritance-tax liability only works properly if the policy itself is structured appropriately.
If a life insurance payout simply falls into the deceased person's estate, it may increase the value being assessed for inheritance tax.
For that reason, policies intended specifically to provide inheritance-tax liquidity are often written in an appropriate trust.
The trustees can potentially receive the insurance proceeds separately from the estate and use or distribute the money according to the trust terms.
But trusts are legal arrangements.
The choice of trustees, beneficiaries and trust wording can have important consequences, particularly where an estate involves:
- Previous marriages
- Children from different relationships
- Vulnerable beneficiaries
- Businesses
- Farms or agricultural property
- Overseas assets
- Large investment portfolios
Our guide to who receives a life insurance payout explains why trusts, wills and policy ownership can produce different outcomes.
Professional legal and tax advice may be appropriate where insurance forms part of a wider estate-planning strategy.
Why whole-of-life cover is different from term insurance
The type of life insurance also matters.
A conventional term life insurance policy runs for a fixed period.
Someone might have £300,000 of cover lasting until age 70, for example.
If they die after the policy has ended, there is no payout.
That can make term insurance suitable for temporary financial risks such as:
- A mortgage
- Children remaining financially dependent
- Replacing earnings during working life
- A business loan
But an inheritance-tax liability is potentially permanent.
If the objective is to provide money whenever death occurs, whole-of-life insurance may be considered because it is designed to remain in force for life, provided the required premiums continue to be paid and the policy conditions are met.
Our guide to what life insurance is and how it works explains the differences between term and whole-of-life protection.
Premium affordability becomes crucial
Whole-of-life cover can last for decades.
That makes the sustainability of the premium particularly important.
A policy designed to provide £200,000 towards an eventual inheritance-tax bill is of little use if the premiums become unaffordable and the cover is cancelled years before death.
Different policies may use different premium structures.
Some provide guaranteed premiums.
Others can involve reviewable premiums that may change over time.
Age and health can also have a significant effect on the cost of arranging new cover.
Someone who waits until much later in life may find that insurance has become substantially more expensive or that medical conditions affect what cover is available.
That does not mean whole-of-life insurance is automatically appropriate simply because an estate may face inheritance tax.
The premium cost needs to be considered alongside the likely tax exposure and other estate-planning options.
Existing life insurance should not automatically be repurposed
Families may already have life insurance.
But the reason that policy was originally arranged matters.
A term policy taken out to repay a mortgage may fall as the mortgage reduces or expire completely once the mortgage term ends.
A family-protection policy might be intended to replace income while children are young.
Neither should automatically be assumed to solve an inheritance-tax issue that could arise decades later.
Equally, a policy originally intended for family protection should not necessarily be altered simply because the tax rules are changing.
The first step is understanding what the existing cover is supposed to achieve.
Pension nominations still matter
The inheritance-tax reform does not mean pension beneficiary nominations become irrelevant.
Pension death benefits can still pass according to pension scheme rules rather than simply being distributed under a person's will.
That makes it important to check that pension providers hold up-to-date beneficiary or expression-of-wish information.
Marriage, divorce, the birth of children, deaths within the family and other major changes can all leave old nominations out of step with someone's intentions.
The inheritance-tax treatment and the question of who receives the pension are related but separate issues.
Do not look at pensions in isolation
The April 2027 reform is a reason to look at the whole estate rather than one asset.
That might include:
- Property
- Pensions
- Savings
- ISAs
- Investments
- Business interests
- Existing life insurance
- Trusts
- Wills
- Pension nominations
- Lifetime gifts
A change affecting the tax treatment of one asset can alter how the rest of the estate fits together.
For example, increasing pension withdrawals could reduce the pension pot but increase cash or investments held within the estate.
Making gifts could potentially reduce an eventual estate, but inheritance-tax rules around gifting can be complex and individual circumstances matter.
Taking out life insurance could provide liquidity without reducing the underlying tax liability.
There is therefore no single response to the pension changes that will suit every family.
The April 2027 change is now approaching
The key point is that the pension reform is no longer simply a possible future policy.
The legislation is in place for deaths occurring from 6 April 2027, while HMRC continues to develop the supporting administrative rules and guidance.
For some households, the change will make no difference because the estate remains below inheritance-tax thresholds or exemptions apply.
For others, including people who have accumulated substantial unused pension savings specifically to pass wealth to the next generation, it could materially change the eventual tax position.
The useful response is not automatically to withdraw pensions, make gifts or buy life insurance.
It is to establish:
What is the estate worth now?
What could fall into the inheritance-tax calculation from April 2027?
Who is intended to inherit?
Is there enough accessible money to meet any eventual tax liability?
And, where life insurance is being considered:
Would the policy genuinely provide the required liquidity, remain affordable for life and be structured so that the payout does not simply increase the taxable estate?
The pension changes are therefore best viewed as a prompt for a joined-up review of pensions, wills, trusts, beneficiary nominations and protection rather than a reason to make one isolated financial decision.
Sources
- HM Revenue & Customs — Inheritance Tax: unused pension funds and death benefits
- HM Revenue & Customs — Technical note: Inheritance Tax on pensions, updated 29 May 2026
- HM Revenue & Customs — Inheritance Tax on Pensions: Technical Note 2, 27 August 2026
- Farrer & Co — Inheritance tax planning after April 2026: trusts, pensions and life insurance, 19 May 2026
Important information
This article is for general information only and does not constitute financial, tax, pension, insurance or legal advice. Inheritance tax, pensions, trusts and life insurance can interact in complex ways and the outcome depends on individual circumstances. Consider taking appropriately qualified professional advice before changing pension withdrawals, making gifts, setting up trusts or arranging insurance for estate-planning purposes.
