Pension IHT Changes 2027: What They Mean for Retirement Planning and Equity Release

What is changing from April 2027?

Currently, unspent pension funds fall outside your estate for inheritance tax purposes. This has made pensions a popular vehicle for passing wealth to the next generation — advisers have long recommended leaving pension pots intact while drawing on other assets first. From 6 April 2027, that advantage disappears.

Under the new rules, unused pension funds and death benefits will be included in your estate valuation for IHT. An "unused pension" means any pension money not yet drawn down — making this most relevant to DC pension holders with unspent pots. If your total estate — including that pension balance — exceeds the available nil-rate band, the pension element will be subject to 40% IHT on the amount above the threshold.

The current nil-rate band stands at £325,000, with a residence nil-rate band of an additional £175,000 where the family home passes to direct descendants. Estates that fall within these bands will be unaffected. But for many homeowners in the South East, London, and other higher-value areas — and for anyone with both a house and a meaningful pension pot — the combined estate value may well exceed these thresholds.

HMRC published a technical note on 11 May 2026 clarifying implementation details. The changes are legislated but not yet in force, which means there is still time to plan around them.

Key exemptions to understand

Not all estates or beneficiaries are equally affected. Two important exemptions apply:

• Assets passing to a surviving spouse or civil partner are exempt from IHT regardless of value. The spouse exemption applies to pension death benefits as well as other assets.
• Assets passing to a registered charity are also excluded from IHT, and charitable legacies can reduce the rate applied to the rest of the estate.

For married couples or those in civil partnerships, the immediate impact may be limited — the first death typically triggers no IHT liability. However, on the second death, the combined estate passes to children or other beneficiaries, and the pension pot is now fully in scope. That is the scenario that requires planning now.

What advisers are recommending

Early data from the adviser community shows a rapid shift in the strategies being explored for clients with significant pension balances. The most common approaches being considered include:

• Earlier drawdown of pension funds — cited by around 47% of advisers surveyed — to reduce the unspent balance that falls into the taxable estate
• Lifetime gifting strategies, mentioned by more than 50% of advisers, to move assets out of the estate while the donor is alive
• Use of ISA, trust, or onshore bond wrappers — favoured by approximately 33% — to shelter assets from the IHT charge
• Whole-of-life insurance policies written in trust, to create a fund that pays any IHT liability on death without reducing the estate passed to beneficiaries

Each of these approaches has trade-offs, costs, and eligibility criteria. The right combination depends on your overall asset picture, your income needs, your family structure, and your intentions for what happens after you are gone.

Where equity release fits into the revised picture

For homeowners with both property and pension wealth, the pension IHT changes alter the relative logic of drawing on each asset class. Previously, the received wisdom was to use property (via equity release or downsizing) as a source of retirement income, while leaving the pension pot untouched to pass on free of IHT. That logic no longer applies after April 2027.

Using equity release to fund income now — rather than drawing down pension early — could still make sense as part of a restructured strategy, but the reasoning changes. It may make more sense to draw pension income first (reducing the taxable balance), while preserving property equity as a long-term resource or inheritance. Or it may be that releasing equity now to fund lifetime gifts achieves a better overall IHT position than drawing from the pension.

These decisions are genuinely complex and individual. The point is that the interplay between property, pension, and IHT has fundamentally changed, and any retirement income plan that was built on the old rules should be reviewed before April 2027 — or sooner.

Why acting now matters

The 2027 changes are not yet in force. That is the planning opportunity. Gifts made more than seven years before death fall outside the estate. Drawdown strategies take time to execute well. Trust structures require legal advice and time to establish. Insurance policies need to be underwritten.

Waiting until April 2027 to begin thinking about this removes most of the options. The most effective planning happens in the years before a change takes effect, not after.

A no-obligation conversation with a specialist FCA-regulated adviser is the logical starting point. Understanding your position does not commit you to any particular course of action — but it ensures that whatever you do is based on a complete picture.