The government’s new draft rules mean that from 6 April 2027 most untouched pension pots will count towards Inheritance Tax.
That move alone is expected to drag an estimated 10,500 new estates into IHT each year and lift average liabilities by about £34,000. Now it’s your executors, not the pension provider, who will be responsible for the paperwork and the bill. Here’s what’s happening, and why good financial advice can make all the difference.
What’s happening and why it matters
Until now, unspent pensions could be passed on free of IHT, so many savers treated them as a family inheritance pot. The Treasury argues that pensions have become an unintended tax loophole and is closing it by folding those untouched funds into the estate calculation. Business-property relief (for example, AIM shares held inside a SIPP) will not reduce the valuation.
Industry feedback showed that making schemes collect and pay the tax would clog the system, so HMRC has pushed the job onto executors instead. That extra admin lands on families already dealing with probate.
The new four-step journey
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Valuation: Each pension provider must, within four weeks of being told about the death, supply executors with a figure and show the split between spouse/civil partner benefits (IHT-free) and everyone else (potentially taxable).
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Add everything up: Executors combine pension values with other assets to check if the estate exceeds the nil-rate bands.
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File the tax return: If tax is due, they file the IHT 400, allocate the bill across beneficiaries, and tell both HMRC and the schemes.
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Pay and release benefits: Payouts to spouses can flow straight away; other beneficiaries share legal responsibility for paying their slice, either by asking the scheme to pay HMRC or by settling it themselves (with an income-tax offset if the member died after 75).
What still escapes the net?
Death-in-service lump sums, dependents’ scheme pensions, and ongoing joint-life annuity payments stay outside IHT, maintaining parity with existing rules. Spouse and civil partner benefits also remain exempt.
Why professional advice just got even more valuable
The new rules demand detective work, precise paperwork, and potentially big decisions about when and how you draw your pension.
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Pension mapping: An adviser can track down every pot and keep an up-to-date schedule for your executors, sparing them months of hassle.
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Updated nominations: Clear, current expression-of-wish forms help schemes split exempt and taxable payouts quickly.
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Strategic drawdown modelling: For some, taking income earlier or buying an annuity may now beat leaving the whole pot untouched.
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IHT-funding solutions: Life insurance, trusts, or gifting strategies can cover or reduce the eventual bill.
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Joined-up estate planning: Coordinating your will, pension nominations, and probate plan avoids conflicts, especially for blended families or unmarried partners.
Good advice turns a looming administrative headache into a manageable, cost-efficient process and can save more in tax than it costs in fees.
Three things to do before 2027
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List every pension and provider so your executors aren’t left guessing.
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Refresh your nomination forms to reflect who you really want to benefit.
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Book a review with a qualified planner to model your IHT exposure and explore solutions.
The draft clauses are out for consultation until mid-September 2025, so details may still shift, watch this space. What is clear is that untouched pensions will soon form part of the IHT picture. If you’d like personal guidance, the PWS Financial Consulting team is ready to help you navigate the change.
If you need advice, we’re here to help. Schedule a free, no-obligation chat here. A guide on selecting a financial advisor is also available here.
