Pension Inheritance Tax Changes: Why 2026 is the year to review your estate planning

From 6 April 2027, the Government intends to bring most unused pension funds and death benefits within the scope of Inheritance Tax (IHT). This represents one of the most significant changes to estate planning in recent years and may affect many individuals who have viewed pensions as one of the most tax-efficient ways to pass wealth to future generations.

Amy Shaw, Legal Assistant in our Wills, Probate & Inheritance Team provides an update on these proposed changes.

As a result of these changes, many families may face a larger IHT bill than they anticipated, making it important to review existing plans well before the new rules take effect.

What is changing?

Under the current rules, unused pension funds can often be passed to beneficiaries without forming part of your estate for IHT purposes.

From 6 April 2027, most unused pension funds and death benefits are expected to be included in the value of your estate when calculating IHT. This means pension savings that was previously outside your estate may become subject to IHT at 40%, depending on the overall value of your estate and the reliefs available.

The main exceptions are expected to be:

• Benefits passing to a surviving spouse or civil partner, where the spouse exemption applies.
• Benefits passing to a qualifying charity.
• Most Death in Service benefits.

How will the new rules work?

Under the proposals, the value of any unused pension funds will be added to:

• The deceased’s personal estate.
• Any relevant trusts or other assets that form part of the overall IHT calculation.

This could significantly increase the value of an estate and potentially result in a higher IHT liability.

Who will be responsible?

The personal representatives i.e. executors of the estate will be responsible for:

• Reporting pension values as part of the estate.
• Completing the relevant IHT reporting requirements.
• Paying any IHT due within the six-month deadline following the end of the month of death.

Where the personal representatives believe there may be IHT due, they may be able to request that up to 50% of pension death benefits are temporarily retained to help meet any potential tax liability.

Pension scheme administrators will not generally become liable for the tax itself. Their role will be to work with the personal representatives and provide the information required to complete the IHT reporting process.

Available IHT allowances will be apportioned across your Estate and pension funds and any IHT due will be paid pro rata.

Who could be affected?

The changes are likely to have the greatest impact on:

• Individuals with substantial pension funds.
• Those who have intentionally preserved pension assets while drawing income from other investments.
• Families whose estates are already close to or above the current IHT thresholds.
• Business owners with significant pension wealth.
• Anyone using pensions as part of a broader wealth transfer strategy.

Even if you do not currently expect your estate to pay IHT, the inclusion of pension assets increases the value and could push your estate beyond available allowances.

Five estate planning priorities before April 2027

1. Understand your Pension position

The first step is understanding exactly what you have.

Work with your financial adviser to ascertain:

• Current pension values.
• Any pensions that remain untouched or undrawn.
• Older workplace pensions that may have been forgotten.
• Any pension benefits linked to trust arrangements.

This is also a good opportunity to review any life assurance policies you hold and establish whether they have been written into trust and therefore outside of your estate for IHT, particularly if they are not expected to be required during your lifetime.

2. Check your beneficiary nominations

Many people have not updated their pension beneficiary nominations for years.

Review:

• Who is currently nominated to receive your pension benefits.
• Whether those nominations still reflect your wishes.
• How pension nominations interact with your Will.
• Whether beneficiaries named in life policy trusts remain appropriate.
• Who may ultimately bear any tax liability arising on death.

Ensuring these arrangements are aligned can help avoid unnecessary complications for your family.

3. Reconsider how you use your assets during your lifetime

Many people have preserved pension funds and drawn income from other investments.

With pensions potentially becoming subject to IHT, it may be worth considering:

• Which assets you use to fund retirement.
• Whether pension withdrawals should form part of your estate planning strategy.
• How different assets are likely to be taxed during life and on death.

Any decisions should be carefully assessed in light of income tax, investment objectives and future spending requirements.

4. Consider whether life assurance could help meet future IHT liabilities

For some families, life assurance may provide funds to help beneficiaries meet any IHT liability.

Whether this approach is suitable will depend on your individual circumstances and affordability.

5. Ensure your Estate plan is joined up

Pensions should not be reviewed in isolation.

Your pension arrangements should work alongside:

• Your Will.
• Existing trusts.
• Lasting Powers of Attorney.
• Business succession planning.
• Wider tax and estate planning arrangements.

A joined-up approach can help ensure that assets pass according to your wishes while making the most of available tax exemptions and reliefs.

Why act now?

The proposed changes represent one of the most significant shifts in estate planning for many years.

The sooner you understand your position, the more options are likely to be available.

Taking advice now allows time to review existing arrangements, assess potential tax exposure and implement any changes well before the rules take effect in April 2027.

If you would like to review your Estate planning, please contact the Amy on 01768 862326.

This article is for general information only and does not constitute tax, legal or financial advice. Tax treatment depends on individual circumstances and may be subject to future legislative change.