Pensions and inheritance tax: the 2027 change, and the legal ways to plan for it

For ten years, the standard advice from almost every adviser in the country was the same. Spend everything else first, and die with your pension untouched. From 6 April 2027 that advice stops working, and for many families it inverts completely.

This is a plain guide to what is changing, what it actually costs, and the legal moves a UK company director can make now. Everything here sits in HMRC’s own manuals. There are no schemes.

What is actually changing in 2027?

In 2015 the old 55% pension death charge was scrapped, and a pension could pass down the family, often with no tax at all. That made it the best inheritance vehicle in Britain.

From 6 April 2027, most unused pension pots and certain death benefits are brought back into your estate for inheritance tax. This is not a consultation or a rumour. It became law in the Finance Act 2026, which received Royal Assent on 18 March 2026.

Same pot, same family, opposite outcome, because the rules moved.

Does it only affect private pensions?

No, and this is the most common misunderstanding. The change applies by registered scheme, not by who set it up.

• Workplace and auto-enrolment pots, including master trusts like Nest: in scope
• Personal pensions and SIPPs: in scope
• Death-in-service lump sums from a registered scheme: out of scope
• Anything passing to a spouse, civil partner or charity: still exempt

If you have an old workplace pot from a previous job, it is caught in exactly the same way a SIPP is.

How much does it cost? The worked example

The figure you will see quoted is up to 64%. That is real, but it only tells the truth with its assumptions attached, so here they are.

Assume you die at 75 or older, with £100,000 of unused pension, your estate is already above the inheritance tax allowances, and your adult child is a higher-rate taxpayer.

First the estate pays 40% inheritance tax. Then, under a rule that already existed, your child pays income tax at their own rate on what they draw from the remaining £60,000. At higher rate that is another £24,000. Your family keeps £36,000 of your £100,000.

The second layer depends entirely on who inherits and how fast they draw it:

• A basic-rate child drawing slowly: around 52% total
• A higher-rate child: around 64%
• An additional-rate earner drawing quickly: around 67%

The point holds either way. The pot you were told to protect for thirty years becomes the most heavily taxed asset you own.

Six legal ways to plan ahead

None of these are clever positions that need the next three Budgets to go your way. They are boring, legal, and documented.

1. Flip the spending order. For an estate above the allowances, the old advice inverts. The pension becomes the pot you spend or move during your lifetime, while ISAs and property wait. You draw it steadily, inside your tax bands, over years, rather than pulling it out in one go.

2. Gifts out of surplus income. Under section 21 of the Inheritance Tax Act, regular gifts made out of income are immediately outside inheritance tax, with no seven-year wait and no cap. Three conditions apply: the gifts form a regular pattern (or a documented commitment to one), they come from income rather than capital, and you keep enough to maintain your own standard of living. Regular pension drawdown counts as income for this. Your executors claim it after death on form IHT403, so contemporaneous records are what make it stick. This is the single most underused exemption in the system.

3. The tax-free cash. You can still take 25% of your pot tax-free, capped at £268,275, a figure fixed in legislation. Take it, gift it, and it becomes a plain seven-year gift. Survive seven years and it is outside inheritance tax, with no income tax on the way out either. Two warnings: dying inside the seven years puts it back in the estate, so this is a lever you pull early rather than from a hospital bed, and you must never recycle it back into a pension, as HMRC’s recycling rule can charge over half of it.

4. The spouse exemption. Everything passing to a spouse or civil partner stays exempt, which defers the whole problem to the second death and buys years of planning room for the moves above. It solves nothing on its own, but the time it buys is real.

5. Annuities, honestly. You will hear that annuities escape all of this. That is only half true. A joint-life income to a survivor is outside the net if it was bought together with your own annuity. But guarantee-period payments and value-protection lump sums are inside it. Anyone who tells you annuities are simply exempt has not read the technical note.

6. Life cover written in trust. This does not cut the tax. It pays the bill, so the family does not have to sell assets to fund it, and the premiums can themselves qualify as gifts out of income. That is a conversation with a protection adviser.

Three things to watch

Keep paying in. Nothing here makes pensions a bad place to build wealth. For a company director, employer contributions remain corporation-tax deductible, free of National Insurance, and the best accumulation wrapper available. What changed is the pension as an inheritance vehicle. This is a planning problem for later life, not a reason to stop saving.

Seven years means seven years. The gift-based moves reward people who start in their fifties and sixties, not those who start after a diagnosis. Deathbed versions fail, and fail expensively.

This is current law, not a guarantee. A £100,000 cap on the tax-free lump sum was considered before the last Budget and dropped. Rules move, which is exactly why the sensible plan is levers you can pull and document now.

The director’s angle

If you have been directing company profits into your pension partly because the pot ended up outside inheritance tax, that specific reason has gone. The whole extraction question, salary against dividends against pension against what stays in the company, is worth running through the new rules.

That is a planning conversation, and it is exactly what our monthly plans are for. Accounts, tax and forward planning for company directors on a fixed monthly fee from £125 a month: see the packages.

If your estate is large enough that this needs restructuring rather than planning, a family investment company or a trust, that sits with CT Private Office.

Watch this on YouTube

I covered this change on camera, with the numbers on screen: The Taxman Gets Up to 64% of Your Pension From 2027. Unless You Do This.

This article is general information, not personal advice. Figures are for 2026/27 and current UK law.