For many people, pension savings are one of the largest assets they have, alongside their home. They are also often treated differently from the rest of the estate when planning for inheritance tax.

That difference is expected to become much less straightforward from 6 April 2027.

From that date, most unused pension funds and pension death benefits are expected to be brought into a person’s estate for inheritance tax purposes when they die. This means pension wealth that may previously have passed outside the inheritance tax calculation could, in future, increase the value of the taxable estate.

For individuals and families who have made wills, pension nominations or wider estate plans based on the current rules, this is an important time to review whether those arrangements still work.

Why pensions have mattered in estate planning

Pensions have often formed part of a wider estate planning strategy because, in many cases, unused pension funds could pass outside the inheritance tax net.

This has influenced how some people use their assets during their lifetime. For example, they may have drawn on savings or investments first, leaving pension funds untouched so they could pass to a spouse, children, grandchildren or other beneficiaries.

From April 2027, that approach may need to be reconsidered. It does not mean that everyone should change how they use their pension, but it does mean that decisions should be made with the new inheritance tax treatment in mind.

What the change could mean in practice

If unused pension funds are included in the estate, they could push the overall estate value above key inheritance tax thresholds.

The standard inheritance tax rate is 40% on the value above the available allowances. The exact position will depend on the total estate value, the beneficiaries, and whether any exemptions or reliefs apply.

The current main allowances remain important:

• Each person has a nil rate band of £325,000

• There may be an additional residence nil rate band of up to £175,000 where a qualifying home is left to direct descendants, such as children or grandchildren

• Married couples and civil partners may, in some cases, be able to pass on up to £1 million free of inheritance tax where unused allowances are transferred

However, the residence nil rate band can be reduced for higher value estates. It starts to taper once an estate exceeds £2 million, reducing by £1 for every £2 above that threshold. For an individual, it can be lost completely once the estate reaches £2.35 million.

This is where the pension change could have a real impact. A pension fund that was previously outside the calculation may bring the estate above the £2 million threshold, reduce the residence nil rate band, or remove it altogether.

A wider issue than pensions alone

Although the change relates to pensions, the effect is much wider.

Your will may leave your home and other assets to certain beneficiaries, while your pension nomination may name different people. If the pension is brought into the estate for inheritance tax purposes, the overall tax position and the balance between beneficiaries may change.

This could create unintended results. It may also cause confusion for executors and personal representatives, particularly where there are several pension schemes, different nominated beneficiaries, or limited cash available in the estate to pay tax.

Check whether gifts and nominations still work together

The pension changes may also affect parts of an estate plan that people do not always think to review.

Charitable gifts are one example. Some people leave a fixed sum to charity, while others use wording linked to a percentage of the estate. In certain circumstances, leaving at least 10% of the estate to charity can reduce the inheritance tax rate on the taxable estate from 40% to 36%.

If pension funds are brought into the inheritance tax calculation, the value of the estate may change. That could affect whether the 10% test is met, or alter the size of a gift where the wording is based on a formula. A clause that once produced the right outcome may have a different effect under the new rules.

Pension paperwork should also be checked. The person named in a pension nomination is not always the same as the beneficiary named in a will, and that may be entirely intentional. However, nominations are often made years earlier and can easily fall out of date after marriage, divorce, separation, bereavement, or changes in family circumstances.

Before April 2027, it is sensible to look at the will and pension nominations side by side. The aim is to make sure they still reflect the same overall plan, avoid uncertainty for those dealing with the estate, and reduce the risk of unintended outcomes for the people or charities you want to benefit.

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Reviewing your arrangements before April 2027

The 2027 changes are a useful prompt to look again at how your estate plan works in practice.

For many people, the main concern will be whether their will, pension nominations and wider financial arrangements still fit together. A will may have been prepared several years ago, when family circumstances, asset values and pension rules looked very different. Pension nominations may also have been completed long before marriage, divorce, bereavement, new grandchildren or changes in family relationships.

A review should look at the whole picture, rather than the will in isolation. This includes the value of your property, savings, investments, pensions, life policies, business interests and any significant gifts made during your lifetime. It should also take account of any debts or liabilities, as these can affect the overall inheritance tax position.

The practical questions are often very simple. Who do you want to benefit? Are the right people named in your will and pension nominations? Could the value of your pension change your inheritance tax position? Would your executors know where to find the information they need? Would there be enough accessible money in the estate to deal with any tax due?

For some people, the answer may be a modest update to a will or pension nomination. For others, particularly where estates are of higher value or family arrangements are more complex, it may be sensible to look more carefully at how assets are held, how pensions are used during lifetime and how wealth is intended to pass on death.

Planning ahead

Although April 2027 may seem some way off, estate planning decisions are usually better made with time and clarity. Leaving matters until the rules are already in force could make it harder to deal with any issues calmly and practically.

For many families, the next step will be to check whether the current arrangements still make sense. That may include looking at the wording of the will, who has been appointed as executors, whether any trusts are still appropriate, and how pension nominations fit with the wider plan for passing on assets.

Legal advice will usually sit alongside financial advice. A solicitor can deal with the will, estate structure and succession planning. A financial adviser can help with pension and retirement planning. Where the estate is higher value or more complex, tax advice may also be needed.

The purpose of the review is to avoid surprises. It can help make sure the people dealing with the estate have clear instructions, the intended beneficiaries are properly provided for, and the inheritance tax position is understood before the new rules take effect.

stevensdrake solicitors advises individuals and families on wills, estate planning, inheritance tax and estate administration. Please contact our Private Client team if you would like to discuss how the April 2027 pension changes could affect your arrangements.

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