The Last Clean Year: Getting Your Pension Ready for the 2027 Inheritance Tax Rule
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From 6 April 2027, unused pension money will count towards your estate for inheritance tax. That makes the 2026/27 tax year the last full one before the rule changes — and a decent moment to check that your paperwork says what you think it says.
What actually changes
At the moment, most defined contribution pension pots sit outside your estate for inheritance tax. You can nominate who gets the pot, and it doesn't add to the total HMRC uses to work out the bill. From 6 April 2027, unused pension funds will be brought into the estate. The nil rate band (£325,000) and the residence nil rate band (up to £175,000, if you leave your home to direct descendants) still apply, but the pension now counts towards the total.
Defined benefit schemes are a different animal — they usually pay dependants' pensions rather than a lump sum — so the change lands differently there. But if you've got a defined contribution pot, a self-invested personal pension, or a workplace scheme that works like one, this is aimed at you.
The maths at £500k, £1m and £2m
Let's keep the assumptions simple: one person, homeowner, everything left to adult children, so the full residence nil rate band is available. No other reliefs. The estate values include the pension pot.
| Total estate (including pension) | Pension pot | IHT before 6 April 2027 | IHT after | Extra |
|---|---|---|---|---|
| £500,000 | £100,000 | £0 | £0 | £0 |
| £1,000,000 | £250,000 | £100,000 | £200,000 | £100,000 |
| £2,000,000 | £500,000 | £400,000 | £600,000 | £200,000 |
At £500k, the pension is small enough that the combined thresholds still cover the estate. The change costs nothing — but only because the estate is under the line. Take away the residence nil rate band, say because you're single with no direct descendants, and the £500k estate would face a bill after 2027.
At £1m, the pension pot of £250k adds £100k to the bill. At £2m, a £500k pot adds £200k. The pattern is simple: the extra tax is 40% of the pension pot, once the estate is already over the thresholds. If the estate is over £2m, the residence nil rate band starts to taper away too, which can make the numbers worse.
Who escapes — and who doesn't
Spouses and civil partners still get the unlimited spouse exemption. If you leave everything to your spouse, there's no inheritance tax on the first death, and the pension pot becomes theirs. But it's now in their estate, so the bill may arrive on the second death. The change doesn't make the pot disappear; it moves the problem down the line.
Unmarried partners are the group that feels this most sharply. There's no spouse exemption for a partner you're not married to or in a civil partnership with. From 2027, a pension left to them is in your estate and could be taxed at 40% above your thresholds. Before 2027, it passed outside the estate. If you're in that position, a nomination form is not a will, and it's worth taking advice.
Charities are exempt, and estates under the thresholds still pay nothing. But 'under the threshold' is doing a lot of work in that sentence — the pension now counts, so it can push you over.
The jobs to do before 6 April 2027
Refresh your nomination. The expression of wish form tells the scheme trustees who you'd like to benefit. It isn't binding, but a stale form can send the pot the wrong way. Check it, date it, and keep a copy.
Check life cover held in trust. If a life insurance policy isn't written in trust, the payout adds to your estate. If it is, it can pay the inheritance tax bill without adding to the estate. That's a cheap check with a potentially large payoff.
Rethink the spend order. The old rule of thumb — spend the ISA first, leave the pension untouched because it's outside the estate — is due a review. From 2027, the pension is in the estate too. There's no universal right answer, but the arithmetic has changed, and it's worth running your own numbers rather than relying on a rule from a different tax world.
Use the gift allowances. The annual £3,000 exemption, small gifts of up to £250 per person, and normal expenditure out of income are all still there. If you're taking pension income you don't need, gifting it regularly could be exempt — but keep records.
Think about charity. Leaving at least 10% of your net estate to charity can cut the rate on the rest from 40% to 36%. For larger estates, that can be a meaningful trade-off.
Talk to the people involved. Especially if you're unmarried, or if your family assumes the pension will pass to them tax-free. The rules are changing, and a conversation now is cheaper than a surprise later.
A calm checklist
You don't have to do everything by 5 April 2027. But the 2026/27 tax year is the last clean run at this. Start with the two quick wins — the nomination form and the trust check — then look at the bigger question of whether to spend the pot or leave it untouched. The answer will depend on your age, your health, your other assets, and who you want to benefit. There's no one-size-fits-all answer, but there is a deadline.
