When a Pension Becomes Part of the Estate: A Family Checklist Ahead of April 2027

For the best part of two decades, the pension has held a curious place in UK estate planning. It has often been the largest asset a family owns after the home, and at the same time the one least troubled by inheritance tax. Death benefits paid at the discretion of scheme trustees have generally sat outside the estate for IHT purposes, which is precisely why so many advisers have long counselled that the pension should be the last pot spent in retirement.

That assumption is now being retired. From 6 April 2027, unused pension funds and lump sum death benefits will be brought within the scope of inheritance tax. The change was signalled in the Autumn Budget of 2024 and has been worked through in consultation since. Some of the administrative mechanics are still being settled, but the direction of travel is clear enough, and families with a few decades of saving behind them should be taking stock now rather than next spring.

What is actually changing

At present, the treatment of a pension on death depends largely on the age at death and the way benefits are paid. Lump sums from a pot where the member died before 75 are typically free of income tax in the recipient's hands; after 75, they are taxed at the recipient's marginal rate. In most modern schemes the trustees or administrators exercise discretion over who receives what, and it is that discretion which has kept the money outside the estate.

From April 2027, the value of unused funds will be counted when the estate is assessed. Scheme administrators are expected to handle the reporting and payment of any inheritance tax arising, recovering the liability from the benefits themselves. Where inheritance tax is due, the government has indicated it intends to prevent beneficiaries also suffering an income tax charge on the same money, but the interaction between the two regimes is one of the finer points still being confirmed.

Who is likely to feel the difference

It is tempting to file this away as a matter for the very wealthy. That would be a mistake. Inheritance tax becomes relevant at £325,000 of estate value, with a further £175,000 available through the residence nil-rate band where a home passes to direct descendants. Those thresholds have been frozen for several years and will remain so until at least 2030, so more estates cross them each year simply through house price growth.

A couple in their sixties with a mortgage-free home worth £450,000 and pension pots totalling £400,000 might previously have regarded themselves as comfortably outside the net. Once the pension is counted, the arithmetic looks considerably less comfortable. Add in the residence nil-rate band taper, which begins to withdraw relief once an estate exceeds £2 million, and it becomes clear that a modest defined contribution pot can nudge a family into a higher effective rate.

Why nominations matter more than ever

An expression of wish is not a legally binding document, but it is the clearest signal a member can give to trustees. Where nominations are out of date, or where no nomination exists at all, the money may end up somewhere the deceased never intended — and from 2027, the tax consequences of that may be considerably more expensive than they once were.

It is worth remembering that transfers between spouses and civil partners remain exempt from inheritance tax. A surviving spouse will not face an immediate charge on pension funds left to them. The difficulty arises on the second death, when the combined pot falls into an estate that may by then be well above the threshold. Couples often assume the exemption solves the problem; in practice it usually defers it.

A seven-point checklist

1. Gather every pot and confirm the nominations. Old workplace schemes are easily forgotten, particularly for anyone who changed employer several times before auto-enrolment became routine. Contact each provider, confirm the expression of wish is current, and note the scheme's death benefit structure.

2. Think through the second death. Model what happens when the first spouse dies and the pension passes across. If the survivor's estate would then exceed the available nil-rate bands, it is worth discussing whether any of that money should be spent, gifted, or redirected earlier.

3. Revisit the order in which you spend. If pensions are no longer the most tax-efficient asset to leave behind, the argument for drawing on them ahead of ISAs and other savings weakens. This is a genuine planning decision, not a rule of thumb, and it depends on your marginal rate now against the likely rate later.

4. Review life cover and check it is written in trust. A suitably drafted trust keeps a payout outside the estate and can put cash in the right hands quickly. Policies that are not in trust fall into the estate by default, however carefully they were chosen.

5. Look at the £2 million boundary. Pension values may now push an estate into the residence nil-rate band taper. Small adjustments — lifetime gifts, spending patterns, charitable legacies — can make a meaningful difference at the margin.

6. Consider charitable giving, but not for the wrong reason. Leaving at least 10% of the net estate to charity reduces the rate on the remainder from 40% to 36%. It suits some families; it is not a universal solution, and it should follow your wishes rather than lead them.

7. Take regulated advice and align it with your will. Pension nominations, wills and trust arrangements are three separate documents that need to tell the same story. An adviser and a solicitor working from the same information will usually produce a better outcome than either working alone.

A question of timing

There is no need for alarm, and no advantage in acting hastily. But the gap between now and April 2027 is short in planning terms, and the changes reward a steady, unglamorous review rather than a last-minute scramble. If your pension is one of your larger assets, and your estate is anywhere near the thresholds, a conversation this winter is likely to be more useful than one next spring.

Tax treatment depends on individual circumstances and may change. This article is general guidance and not a substitute for personalised advice.