2024 Budget Changes

Inheritance Tax &
Pension Planning

From April 2027, unused pension funds will be included in your estate for inheritance tax purposes — a major change announced in the October 2024 Budget. Many people who previously had no IHT liability will now face significant tax bills. PDA Law can help you plan ahead.

Speak to an Estate Planning Solicitor 01244 757 352

October 2024 Budget: From 6 April 2027, unused pension funds and death benefits will be included in your estate for inheritance tax purposes. This affects SIPPs, defined contribution pensions, and most other pension arrangements. Review your estate plan now.

What is Changing from April 2027?

Currently, most pension funds are held in a discretionary trust by the pension provider and do not form part of your estate for inheritance tax purposes. This has made pensions one of the most tax-efficient ways to pass wealth to the next generation — many people have deliberately left pension funds untouched to pass them on free of IHT.

From 6 April 2027, this changes. Unused pension funds and death benefits will be included in your estate when calculating whether IHT is due. At the current rate of 40% on assets above the nil rate band (£325,000), this could result in a significant tax bill for many families.

The change applies to defined contribution pensions, SIPPs, and most other pension arrangements. It does not affect the pension income you receive during your lifetime — only the funds remaining in your pension when you die.

Before April 2027

Pension funds outside your estate
No IHT on pension death benefits
Pensions passed to beneficiaries free of IHT

From April 2027

Pension funds included in your estate
IHT at 40% on pension funds above nil rate band
Many previously IHT-free estates now liable

Planning Strategies to Consider

Review your expression of wishes

Ensure your pension provider has up-to-date nominations. The interaction between your will and pension nominations will affect the overall IHT position.

Consider accelerating drawdown

Drawing down pension funds before April 2027 and gifting the proceeds may reduce your estate's IHT liability, subject to the 7-year rule for potentially exempt transfers.

Use annual exemptions and other reliefs

The annual gift exemption (£3,000), small gifts exemption, and normal expenditure out of income exemption can all be used to reduce your estate.

Review your will

Your will may need to be updated to reflect the new IHT position of your pension. Spousal exemption and charitable giving can still reduce IHT.

Consider life insurance in trust

A whole-of-life policy written in trust can provide a lump sum to cover the IHT bill without adding to your estate.

Speak to an Estate Planning Solicitor

Get clear advice on how the April 2027 pension IHT changes affect your estate and what you can do now to plan ahead.

Make an Enquiry 01244 757 352

Related Services

Frequently Asked Questions

Will my pension be subject to inheritance tax?

From April 2027, unused pension funds and death benefits will be included in your estate for inheritance tax purposes. This is a significant change from the current position, where most pension funds pass outside of your estate and are not subject to IHT. The change was announced in the October 2024 Budget and applies to defined contribution pensions, SIPPs, and most other pension arrangements.

What is the current position on pensions and IHT?

Currently (before April 2027), most pension funds are held in a discretionary trust by the pension provider and do not form part of your estate for IHT purposes. This means they can be passed to beneficiaries free of IHT. This has made pensions a popular estate planning tool. From April 2027, this exemption will be removed.

What can I do to reduce the IHT impact on my pension?

There are several strategies to consider: drawing down pension funds during your lifetime and gifting the proceeds (using annual exemptions, potentially exempt transfers, or other reliefs); using pension funds to fund life insurance written in trust; reviewing your expression of wishes to ensure pension funds are directed to the most tax-efficient beneficiaries; and considering whether to accelerate pension drawdown before April 2027. PDA Law can advise on the most appropriate strategy for your circumstances.

Does the change affect defined benefit (final salary) pensions?

The April 2027 changes primarily affect defined contribution pensions and SIPPs. Defined benefit (final salary) pensions typically pay a spouse's or dependant's pension on death rather than a lump sum, so the IHT treatment is different. However, some defined benefit schemes offer lump sum death benefits, which may be affected. You should review your specific scheme rules.

What is the nil rate band and how does it interact with pension IHT?

The nil rate band is the amount of your estate that can pass free of IHT — currently £325,000 per person (frozen until at least 2030). The residence nil rate band adds a further £175,000 where a main residence passes to direct descendants. From April 2027, your pension fund will be added to your other assets when calculating whether your estate exceeds these thresholds. This means many people who previously had no IHT liability may find their estate becomes liable.

Should I update my will in light of the pension IHT changes?

Yes — the April 2027 changes make it more important than ever to review your will and overall estate plan. Your will may need to be updated to reflect the new IHT position of your pension. You should also review your expression of wishes with your pension provider, as the interaction between your will and your pension nominations will affect the overall IHT position of your estate.

Plan Ahead for the April 2027 Changes

PDA Law's estate planning solicitors can review your pension arrangements, update your will, and help you implement strategies to minimise the IHT impact of the 2024 Budget changes.