Autumn Budget: Unused Pensions to Be Subject to Inheritance Tax from 2027

One of the most significant and far-reaching changes announced in the Autumn Budget is the decision to bring unused pension funds into the scope of Inheritance Tax (IHT) from 2027.

This represents a fundamental shift in the way pensions are treated on death.
Until now, undrawn pension pots have typically sat outside an individual’s estate for IHT purposes — making pensions one of the most powerful tools in long-term wealth and estate planning.

From 2027, this position changes.
And for many families, the impact will be game-changing.

What Has Been Announced?

From April 2027, any undrawn pension funds left in a pension pot at death will:

• Form part of the deceased’s estate, and
• Be subject to Inheritance Tax where the estate exceeds the nil-rate thresholds

This applies regardless of whether the pension is:

• Defined contribution
• Personal pension
• SIPP
• Workplace scheme with drawdown options

This effectively removes the long-standing IHT protection on untouched pension balances.

Why This Matters

For the past decade, pensions have been one of the most tax-efficient ways to pass on wealth. Under current rules:

• Undrawn pensions usually fall outside the estate
• They typically avoid IHT
• They can be passed to beneficiaries tax-free (depending on age at death)
• They can grow tax-efficiently even after retirement

Many individuals deliberately preserve their pension pots — drawing from ISAs, savings or investments first — to maximise the amount passed down to future generations.

From 2027, this strategy will change dramatically.

Who Will Be Affected?

This measure affects:

1. Individuals with significant defined contribution pension savings

Especially those with large pots intentionally left untouched for estate planning.

2. Retirees drawing from ISAs or non-pension assets first

A widely used approach that will now become less tax-efficient.

3. Families expecting to inherit unused pensions

These inheritances may now be subject to a potential 40% IHT charge, depending on the estate size.

4. High-net-worth individuals with multiple pension pots

The impact on estates exceeding the IHT threshold will be substantial.

5. Financially cautious retirees

Individuals who purposely avoid drawing from their pension may now face an entirely different planning landscape.

Why This Is Being Done

This reform aligns with the broader Budget strategy to:

• Expand the IHT tax base
• Increase total tax receipts
• Ensure pensions are used for retirement income — not primarily for inheritance planning
• Align the treatment of pensions more closely with other types of wealth

From an Exchequer perspective, it taps into a growing pool of pension wealth that previously sat outside IHT entirely.

Planning Will Be Essential

This change radically alters retirement and estate planning strategies.
Individuals should start thinking now about:

1. Order of withdrawals in retirement

It may become more efficient to draw pension first, and leave ISAs or certain investments as inheritance vehicles.

2. Lifetime gifting strategies

Using assets outside pensions for gifting during lifetime may become more attractive.

3. Combining pension withdrawals with investment planning

Withdrawn pensions (within allowances) could be reinvested in IHT-efficient structures.

4. Using pension drawdown earlier

Moderate withdrawals may reduce the taxable pension pot over time.

5. Spousal planning

Pension transfers between spouses may need to be revisited in light of estate planning goals.

6. Reviewing beneficiary nominations

Beneficiaries may face significant IHT — nominations should be kept up to date and tax implications understood.

Potential Consequences for Retirees

From 2027, individuals may need to rethink:

• Whether to continue preserving pension funds
• How much to draw and when
• The balance between tax-efficient income and IHT-efficient inheritance
• Portfolio structure across pensions, ISAs and investments

For many, this is likely to be one of the most important financial planning decisions of the next decade.

Summary

The decision to bring unused pension pots into the scope of Inheritance Tax from 2027 marks one of the most transformative reforms in years.
This rule will significantly affect retirement strategies, estate planning, and intergenerational wealth transfer.

For those wanting to protect family financial outcomes, careful planning is now essential. Merranti Accounting can help model the impact, explore alternative strategies and ensure your plans remain both tax-efficient and aligned with your long-term goals.