From April 2027, pensions will no longer sit outside the inheritance tax net – a major shift that could reshape intergenerational wealth planning. In this exclusive article, James Floyd, Managing Director at Alltrust Services Limited, warns that advisers must act now to prepare clients for the new rules, review outdated beneficiary nominations, and implement robust estate planning strategies to protect family wealth from avoidable tax exposure.
Pensions will lose their IHT shelter status
Under current legislation, defined contribution pensions typically sit outside the taxable estate on death. Funds can be passed to nominated beneficiaries tax-free where death occurs before age 75, or at the recipient’s marginal rate of income tax if after 75. This has made pensions an effective “IHT shelter” for wealth accumulated over a lifetime.
From 6 April 2027, several key changes will take effect. Pension savings held within defined contribution schemes will be included as part of an individual’s estate for inheritance tax purposes, and their value will be aggregated with other assets.
Any amount that exceeds the nil-rate band of £325,000 per person will potentially be doubled through the transferable nil-rate band. After applying available reliefs, this will be taxed at 40%.
The residence nil-rate band will continue to apply when property is passed on to direct descendants; however, it will not extend to pension savings. In some cases, there may also be a risk of double taxation, as beneficiaries could face income tax on withdrawals from crystallised funds in addition to inheritance tax at the estate level.
For a client with a £750,000 SIPP, a surviving spouse may now face a £170,000 IHT liability on top of income tax when drawing funds.
New reporting duties will increase complexity
The legislative change introduces not just new liabilities but also new reporting duties.
Executors and beneficiaries will need to obtain pension valuations at the date of death, including both crystallised and uncrystallised pots. They will also be required to identify death benefit entitlements and complete IHT400 forms (including the pension values).
Income tax and IHT liabilities will also need to be reconciled, where beneficiaries receive funds via drawdown or lump sum.
Given that many individuals hold multiple arrangements like SIPPs, group personal pensions, or legacy contracts, accuracy and coordination will be critical. Delays or errors in reporting could attract penalties or lead to unexpected tax demands later.
Firms can add value through technical guidance and administration
Families will need more structured support to comply with these obligations, and there are a couple of ways to add value. One is through technical guidance, by helping executors and advisers interpret the interaction between scheme rules, discretionary trustee powers and HMRC requirements.
The other is with streamlined administration where firms coordinate directly with advisers, beneficiaries and professional executors to gather valuations, prepare supporting evidence and liaise with HMRC.
By centralising this process, the risk of errors is minimised and the administrative burden at what is often a stressful time is reduced.
Beneficiary nominations must be reviewed
One area that demands immediate adviser attention is beneficiary nomination forms. These are frequently left unchanged for decades, despite significant life events. From 2027, pensions will fall into the taxable estate, making it crucial to ensure nominations are accurate and up to date.
Without appropriate nominations, trustees retain discretion which, while useful for IHT mitigation under current rules, could lead to unintended consequences once pensions are taxable. Advisers should treat nomination reviews as part of their standard client review cycle.
Reconsidering intergenerational planning strategies
Meanwhile, the 2027 reforms also highlight the need for structured intergenerational planning. Passing pension wealth directly to adult children or grandchildren may prove more efficient than routing everything to a surviving spouse, particularly where that spouse’s estate is already significant.
Advisers should revisit the role of:
• Bypass trusts – still relevant in some circumstances for controlling how benefits are cascaded.
• Lifetime gifting strategies – making use of annual allowances and exemptions outside pensions.
• Phased drawdown – encouraging clients to draw from pensions strategically during their lifetime to reduce taxable estate values at death.
Early action will be essential
While April 2027 may seem distant, the scale of these changes means early preparation is essential. Families who leave planning too late could face significant, unexpected IHT liabilities, increasing the administrative complexity for executors and resulting in beneficiaries receiving materially reduced inheritances.
Advisers ought to expect structured guidance, efficient administration and forward-looking strategies that preserve family wealth wherever possible.
The introduction of IHT on pensions represents a fundamental shift in wealth transfer planning. Advisers must guide clients through both compliance and long-term strategy to ensure assets are passed on effectively.
Families must be supported through this transition and have reporting obligations clarified and the administrative burden reduced.
The message is clear: review beneficiary nominations, model liabilities, and waste no time in planning well before 2027.
