Pensions and Inheritance Tax: New Rules from April 2027

For many years, pensions have played a valuable role in estate planning because, in most cases, unused pension funds fell outside the inheritance tax (IHT) net.

That position is changing.

From 6 April 2027, the Government intends to bring most unused pension funds and pension death benefits into the scope of inheritance tax for the first time.[HMRC]

This change could have a significant impact on how pensions are treated on death, particularly where benefits are not paid directly to a surviving spouse or civil partner.

What is changing?

Under the proposed rules:

  • Unused pension funds and pension death benefits will generally be treated as part of the deceased’s estate for inheritance tax purposes
  • This means pension benefits may be taxed at up to 40% where the estate exceeds available allowances
  • The long-standing assumption that pensions are “outside the estate” will no longer automatically apply

What is not changing?

Some important protections remain:

  • Spouse and civil partner exemption still applies
    Where pension benefits pass to a surviving spouse or civil partner, they should remain free of inheritance tax on the first death
  • Pensions will still usually pass outside the will and probate process
  • Death-in-service benefits under registered schemes are expected to remain outside the new rules [HMRC]

Why this matters if you use a Pension (Pilot) Trust

Many clients quite sensibly have an Expression of Wish directing pension death benefits to a Pension (Pilot) Trust.

Historically, this offered:

  • Speed of payment
  • Flexibility for trustees
  • Protection for younger or vulnerable beneficiaries
  • IHT efficiency

However, from April 2027, directing pension benefits to a trust (rather than directly to a spouse) may mean:

  • The pension is no longer sheltered from inheritance tax
  • The pension value is added to the deceased’s estate for IHT purposes
  • A tax charge may arise even on the first death, depending on the wider estate position

In other words, a structure that was once tax-efficient may now produce an unexpected inheritance tax bill.

Does this mean Pension (Pilot) Trusts are no longer useful?

Not at all — but it does mean they must be reviewed in context.

Pension trusts may still be appropriate where:

  • Control and flexibility are more important than outright spousal ownership
  • Beneficiaries are children, grandchildren, or vulnerable dependants
  • Asset protection or remarriage planning is a concern

What does matter is that:

  • The Expression of Wish
  • The trust structure
  • The overall estate plan

are properly aligned with the new rules.

What should you do now?

You do not need to take immediate action — but you should:

✔ Review who your pension death benefits are intended to benefit
✔ Check whether your Expression of Wish still reflects your intentions
✔ Consider whether benefits should pass to a spouse first, rather than to trust
✔ Ensure pension planning and your will work together under the new rules

How we can help

Together with your trusted IFA, we are already reviewing pension and trust arrangements for clients in light of these changes, including:

  • Reviewing Expressions of Wish
  • Advising on whether existing Pension (Pilot) Trusts remain appropriate
  • Updating trust wording where needed
  • Ensuring pension planning complements wills and inheritance tax allowances

If you would like us to review your arrangements, or simply discuss how these changes may affect you, please get in touch. There is no obligation to proceed.

 

Important note: Lifetime Trustees Ltd provides advice on wills, trusts, and estate-planning structures only.We do not provide financial advice or accountancy advice. Where appropriate, we work alongside our clients’ existing independent financial advisers (IFAs) to ensure joined-up planning. If you do not currently have an adviser, we can introduce you to independent, trusted, and appropriately authorised financial advisers with whom we regularly work.