1. What is changing, and when: pensions brought into the IHT estate from April 2027

The policy change announced at the Autumn Budget 2024 proposes that, from 6 April 2027 and subject to legislation, unused defined contribution pension funds at death will be included in the taxable estate and counted towards the £325,000 nil‑rate band; where total estate value exceeds £2 million, this could also taper away the £175,000 residence nil‑rate band, which reduces by £1 for every £2 above that threshold. This shifts the treatment that currently allows many DC pensions to sit outside the estate entirely. In practical terms this means Inheritance Tax, charged at 40% above the nil‑rate band, could apply to pension pots that previously passed free of IHT. For the official announcement see the Autumn Budget materials and for the current Inheritance Tax rules see the government’s Inheritance Tax guidance.

Key exclusions confirmed by HMRC

Not all pension-related death benefits fall within the new rules. HMRC has confirmed the following are excluded: death-in-service lump sums paid from registered pension schemes; dependants’ scheme pensions from defined benefit or collective money purchase arrangements; and assets passing to a surviving spouse or civil partner, which continue to benefit from the spousal exemption – no Inheritance Tax arises on transfers between spouses or civil partners regardless of estate size. Charitable legacies remain exempt too. For many families where there is a surviving spouse, the practical implication is a deferral rather than an immediate charge: the pension passes to the survivor free of Inheritance Tax, with any liability potentially arising on the second death. This deferral makes planning the survivor’s estate – reviewing their own pension, nil-rate band position and overall estate composition – all the more important to address now.

2. Why this matters for high net worth families: pensions as a legacy vehicle have been re‑priced

For decades many wealthy families relied on defined contribution pensions to move capital to beneficiaries without adding to the probate estate. A workplace pension often benefits from employer contributions and tax relief that effectively boosts your saving, while passing to nominated beneficiaries outside probate. That safety valve is now re‑priced. HMRC recorded a record £7.5 billion of Inheritance Tax receipts in 2023/24, and with the nil‑rate band frozen at £325,000 since 2009 more estates are already exposed to fiscal drag. If you have multiple pension pots totalling £500,000, £1 million or more, even a single large pot could push your estate across the £325,000 threshold and expose part of your pension to the 40% Inheritance Tax charge.

3. Death benefit nominations: why you must review nominations and probate timing now

Death benefit nominations remain crucial because they direct where pension money goes and can keep payments outside probate, but nominations will no longer guarantee an IHT-free transfer. Review your beneficiaries on every pension scheme, including workplace and personal SIPPs, and confirm whether your nomination is binding or discretionary. The technical rules on payouts and tax status are complex; current guidance explains how pension providers pay benefits and how drawn down pensions interact with beneficiary taxation. If you rely on an occupational plan with a trustee decision structure, check trustee minutes and scheme documentation now. Small administrative tweaks completed in 2025 or 2026, such as updating nominations or ensuring trustees have up-to-date family information, could materially simplify the post-death process and reduce delay in meeting any potential tax liability.

Subsection: Probate timing and liquidity

Because pension funds brought into the estate could increase the IHT bill, consider how the estate will meet any payment due. Probate timing varies, often taking three to nine months for estates with straightforward assets and over a year for complex estates or where property requires probate valuation. If the estate needs to cover a 40% IHT liability on pension amounts that push the estate above £325,000, you may need liquid assets or insurance to avoid forced asset sales. Review bank account balances, investment account lock‑up periods, and the feasibility of a short‑term bridging loan to preserve strategic assets such as property or business shares.

HMRC has confirmed that personal representatives – not pension administrators – are responsible for reporting and paying any Inheritance Tax due on pension funds included in the estate. The payment deadline is six months from the end of the month of death. To help estates manage cashflow, a 50% withholding mechanism is available for up to 15 months: the pension administrator retains half of any lump sum death benefit to cover an estimated Inheritance Tax liability, giving the estate time to arrange payment before releasing the remainder to beneficiaries. Understanding this mechanism is material to the liquidity planning discussion: it reduces the risk of forced asset sales, but it also means beneficiaries may wait several months before receiving their full entitlement.

4. Drawdown versus gifting: near‑term steps to consider before April 2027

With the clock running to April 2027, consider accelerating tactical moves that could reduce future IHT exposure: drawing down pension funds to spend or gift, increasing pension contributions to capture current tax relief, or using normal income gifting where you have surplus income to give regularly. Drawing down £100,000 in 2025 or 2026 and gifting sums to family, charities or trusts could change the composition of your estate by April 2027; remember inherited drawdown income tax rules remain in force, so beneficiaries who inherit pensions in drawdown after age 75 will pay income tax at their marginal rate on withdrawals. Before changing your salary/dividend mix or making large gifts, model the cashflow and tax impact, and discuss a pension and retirement planning strategy with an adviser who can use detailed projections.

Subsection: Practical illustration

Imagine a single individual with a £1.2 million pension pot, a £600,000 property and £300,000 of other assets. Under the proposed rules the pension could be counted within the £325,000 nil‑rate band, exposing tens or hundreds of thousands of pounds to 40% tax. Drawing down £200,000 over two years or making lifetime gifts that qualify as normal expenditure could reduce the taxable estate; conversely increasing pension contributions before the change may push more into the pension wrapper but those additional contributions would also be caught by the new rule if unused at death. Each route affects income tax, National Insurance and cashflow, so detailed modelling is essential.

5. Structural and protective options: trusts, insurance and family structures to review

Longer‑term structural options remain relevant, and many families should review trusts, whole‑of‑life insurance held in trust, and family investment companies as part of a coordinated plan. For example, a whole‑of‑life policy written to match an estimated 40% liability on an anticipated inheritance tax exposure can provide liquidity to heirs; placing that policy in trust may help the proceeds avoid the estate. Trusts can be used where appropriate, but they have their own tax rules and reporting obligations; use a solicitor experienced in private client work. If you operate a family investment company with distribution policies and shareholder agreements, examine how pension inclusion could alter your overall estate modelling. Consider a comprehensive tax and estate planning review with an integrated team of adviser, solicitor and accountant to model outcomes under different scenarios.

Subsection: Commercial practicalities

Insurance premiums, trust setup fees and accountancy costs vary; a whole‑of‑life policy to cover a £500,000 potential IHT bill might cost several thousand pounds a year depending on age and health. Trust establishment often starts from a few hundred to a few thousand pounds, and ongoing trustee administration and tax filing add recurring costs. These expenses should be weighed against the potential 40% tax on assets above the nil‑rate band, plus the administrative benefit of providing heirs with liquidity rather than forcing asset sales. Ask your professional team for scenario cost estimates before implementing any structure.

6. Take action with your adviser now: modelling, review and implementation

This is a planning window, not a panic room. Start with a full estate model that includes every pension pot, the £325,000 nil‑rate band and the £175,000 residence nil‑rate band where relevant, and test scenarios for 2025, 2026 and the proposed April 2027 implementation. Work with an adviser to explore drawing down pensions, accelerating lifetime gifts, or arranging cover to meet potential IHT bills; you can begin with a comprehensive tax and estate planning review and a tailored pension and retirement planning strategy. For further reading, consider our expert guides on estate planning. Any course of action should be reviewed with a qualified adviser and legal counsel because personal circumstances and legislation can change.

Subsection: Author note and next steps

If you would like a structured review, I am Joshua Gill, Independent Financial Adviser at Humboldt Financial, specialising in Estate Planning, Retirement & Pension Planning and optimisation for the self-employed and limited companies. You can learn more about my background at my profile page for Joshua Gill. A typical engagement begins with data gathering, then a two‑scenario model and a recommendation pack; timing from initial meeting to actionable plan commonly takes four to eight weeks depending on document availability.