When the Pension Pot Becomes Part of the Estate: Planning Before April 2027

For many UK savers, the pension has long occupied a privileged place in estate planning. It has been possible to build a substantial fund, draw an income in retirement, and still pass much of the remaining pot to a nominated beneficiary without the fund forming part of the estate for inheritance tax. That assumption is now on a countdown.

From 6 April 2027, unused pension funds and death benefits are due to be included in the estate for inheritance tax purposes where death occurs on or after that date. The policy was announced in the Autumn Budget 2024, and the detailed mechanics continue to depend on legislation and scheme rules. What is already clear is that pensions can no longer be treated as a simple inheritance-tax shelter by default.

The end of the pension IHT shelter

The change matters because it alters the role of the pension in a family’s balance sheet. A defined contribution pot is no longer just a retirement income vehicle; it is also a potential inheritance-tax asset. For some households, the difference will be modest. For others, particularly where the pension is large relative to the rest of the estate, the effect could be significant.

The date is not retrospective. Deaths before 6 April 2027 are not caught by the new approach. But a death on or after that date will bring the rules into play, which is why planning in 2026 is less about last-minute rearrangement and more about reviewing the structure that is already in place.

Who is most exposed

The households most likely to feel the change are not necessarily the wealthiest in absolute terms. Exposure depends on the size of the pension relative to the available nil-rate band and residence nil-rate band, the identity of the beneficiaries, and the rest of the estate.

Several groups deserve particular attention:

• Unmarried partners and cohabitants. The spouse or civil partner exemption can shelter transfers between partners, but it does not apply to unmarried couples. A pension nomination to a long-term partner may therefore create an inheritance-tax exposure that a spouse would not face.
• Families with adult children as beneficiaries. Where a pension is nominated to children, the fund is likely to be exposed to inheritance tax unless another relief or exemption applies.
• Blended families. A nomination made in one family context may not fit a second marriage or a changed relationship with children from a first family.
• Estates close to the residence nil-rate band taper. The interaction between pension values, the family home and the taper threshold can produce unwelcome surprises if the pension is left out of the modelling.
• Those who have used the pension deliberately as an IHT-efficient wrapper. The old logic of spending other assets first and preserving the pension may need to be revisited.

Defined benefit schemes and defined contribution arrangements do not behave in the same way. Death benefits, dependants’ pensions and lump sums may be treated differently under scheme rules. The final position will require a scheme-by-scheme review rather than a single estate-wide assumption.

Nominations, trustees and the limits of an expression of wish

Beneficiary nominations have always mattered, but they now carry more weight. An expression of wish tells the scheme trustees who the member would like to receive death benefits. It is not usually a binding instruction, and trustees often retain discretion, but it is a strong signal.

From 2027, the identity of the recipient can affect the inheritance-tax outcome. A payment to a surviving spouse or civil partner may fall within the spouse exemption, subject to domicile and the usual conditions. A payment to a cohabitant, friend or adult child will generally not. A payment to a qualifying charity may attract charitable exemption. The nomination is therefore not merely an administrative preference; it is part of the tax planning.

Scheme rules also matter. Some arrangements pay a lump sum; others offer drawdown to beneficiaries; others may provide dependants’ pensions. The inheritance-tax treatment of these benefits may not be identical, and the trustees’ powers may affect who can receive what. A nomination that conflicts with the will, or that has not been reviewed after a divorce or bereavement, can create avoidable uncertainty.

What to do before April 2027

A practical 2026 review should begin with information rather than action. The first step is to build a complete pension inventory: provider, scheme type, death benefit options, nomination date and any restrictions in the scheme rules. Old workplace pensions are easily overlooked.

Second, model the estate with the pension included. This means looking at the available nil-rate band, the residence nil-rate band, any taper, and the effect of the pension on the total inheritance-tax bill. The aim is not to produce a single forecast but to understand the range of outcomes.

Third, review beneficiary nominations alongside the will. The two documents should tell a coherent story. If the will assumes the pension will pass to one person but the nomination points elsewhere, the family may face a dispute or an unintended tax result.

Fourth, consider the order of withdrawals. For some households, spending from the pension rather than from ISAs or other savings may reduce the eventual estate. For others, the income tax trade-offs will point the other way. There is no universal rule, and the answer will depend on age, health, tax position and the needs of the survivor.

Fifth, take advice on liquidity. If the pension is likely to generate an inheritance-tax liability, the family should understand how that liability will be paid and whether other assets are available. Insurance or trust arrangements may help in some cases, but they are not a substitute for a coherent estate plan.

Common assumptions to discard

Several assumptions are now unsafe. The first is that pensions are inheritance-tax-free. The second is that a nomination overrides the tax rules. The third is that spouse exemption solves every problem; it can defer the issue, but it does not remove it from the balance sheet. The fourth is that all schemes are the same. The fifth is that April 2027 is distant. From November 2026, it is close enough to warrant a review before the next tax year.

The change does not make pensions a bad savings vehicle. It does mean that the pension should be seen as part of the whole estate, with the same discipline applied to nominations, beneficiaries and liquidity as to the family home or investment portfolio. The families who fare best will be those who start with a clear inventory and a realistic model, rather than those who wait for the final rules and then attempt a hurried rearrangement.