The biggest pension rule change in a decade: unused pension pots join the estate for inheritance tax from April 2027 — what changes, the double-tax effect after 75, and how it rewrites the 'spend the pension last' doctrine.
For a decade, the defined-contribution pension has been the UK's best inheritance vehicle: pots passed to beneficiaries entirely outside the estate, free of inheritance tax whatever their size. From April 2027 that ends — unused pension funds and most death benefits will count as part of the estate for IHT, announced in the October 2024 Budget and unchanged since.
Today, a £500,000 estate plus a £400,000 pension is taxed as a £500,000 estate — typically no IHT at all for a couple. From April 2027 the same position is a £900,000 estate: the pension consumes nil-rate band, can push the total past the £2m taper that erodes the £175,000 residence band, and the excess bears 40%. Pensions go from the last asset the taxman sees to just another line in the estate.
The change stacks on a rule that already existed: die after 75 and beneficiaries pay income tax at their own marginal rate on what they draw from an inherited pension. From 2027 that income tax applies to a pot already reduced by IHT — 40% IHT, then 40% income tax on the remainder leaves a higher-rate beneficiary with 36p of each original pound: an effective rate around 64%, among the highest in the UK system.
The textbook ordering — spend ISAs and taxable accounts first, preserve the pension for heirs — was built on the old rule, and 2027 weakens it substantially. Drawing pension income earlier (filling the basic-rate band each year), taking tax-free cash and gifting it on the 7-year clock, and spending the pension while leaving ISAs to compound in the estate all move from eccentric to arguable. None is automatically right: the pension keeps its lifetime tax shelter and the change taxes what's left, not what you use. Hundred Summers' Inheritance tab has modelled the 2027 rule since launch — a toggle shows your estate and IHT with pensions in and out, so the size of the change on your own numbers is one click, and the free IHT calculator includes it too.