Families urged to rethink pension inheritance planning ahead of April 2027 tax change
From 6 April 2027, unused pension funds will be subject to inheritance tax for the first time, prompting advisers and families to review their estate plans and consider using life insurance held in trust to protect their wealth.
Financial advisers and solicitors are beginning to highlight a major shift in how UK families should approach inheritance planning, as a significant change to pension taxation draws closer. From 6 April 2027, any unused pension savings will be brought into the value of a deceased person's estate for inheritance tax purposes, potentially creating a substantial tax bill for beneficiaries.
The change, enacted in the Finance Act 2026 following the Autumn Budget announcement, fundamentally alters the tax-efficient nature of pensions as a wealth transfer tool. Previously, pension death benefits passed outside an individual's estate and were not subject to the 40 percent inheritance tax charge. Now, families with significant pension savings face the prospect of seeing those funds subject to inheritance tax, which could leave beneficiaries having to pay tens of thousands of pounds in tax.
For families with pensions exceeding the inheritance tax nil rate band of 325,000 pounds, the impact could be severe. An adviser estimate suggests that around 10,500 estates in 2027 to 2028 could become liable for inheritance tax as a result of this change alone. The solution, according to estate planning professionals, is to review pensions early and put appropriate protections in place, such as writing a life insurance policy into trust to cover the anticipated inheritance tax bill.
A life insurance policy held in trust sits outside the insured person's estate entirely. When written into trust from outset, the insurance payout is received by trustees and passes to beneficiaries free of inheritance tax, and importantly, is usually paid within weeks rather than facing months of delay waiting for probate. Combined with advance planning around pension death benefits and gifts, this approach can dramatically reduce the tax burden on families.
Based on reporting by UK Government (2026). Information only, not advice.
Information only. This is general information, not financial, tax or legal advice, and not a personal recommendation. Tax rules depend on your individual circumstances and can change. Please speak to a qualified, FCA-regulated adviser or a solicitor before acting.