I've been sitting with this one for a while, partly because the policy detail is genuinely fiddly and partly because I wanted to wait until HMRC published its technical consultation response before writing anything definitive. We now have enough to work with. From April 2027, defined contribution pension funds that you haven't spent — the pot sitting in your SIPP or workplace pension when you die — will for the first time be brought inside your estate for inheritance tax purposes. That's a significant structural shift. For the last couple of decades, the received wisdom in retirement planning was "spend other assets first, let the pension pass IHT-free." That playbook is being rewritten. I'm still working through some of the edge cases myself, but the core mechanics are clear enough that I think it's worth walking through them now, before April 2027 starts to feel urgent and rushed.
what is actually changing (and what is not) ¶
Right now, unspent DC pension funds — money in a SIPP, a personal pension, or most workplace defined contribution schemes — sit outside your estate for IHT. If you die before 75, they pass to named beneficiaries completely free of income tax and IHT. After 75, beneficiaries pay income tax when they draw the money, but still no IHT. From April 2027, the IHT exemption disappears. The funds will be aggregated with the rest of your estate and taxed at 40% above the nil-rate band thresholds. What is not changing: the nil-rate band itself (currently £325,000), the residence nil-rate band (£175,000 where it applies), the spousal exemption (transfers between spouses remain IHT-free), and the income tax treatment when beneficiaries actually draw funds. That last point matters — HMRC is clear that pension funds brought into the IHT estate will still be subject to income tax on withdrawal by the beneficiary. So in the worst case, a pension pot passing to an additional-rate taxpayer could face IHT at 40% on the estate and then income tax at 45% on drawdown. That effective rate needs to be part of your modelling.
how the administration will work (the awkward bit) ¶
This is where it gets operationally messy, and I'll be honest — I think there will be teething problems in the first couple of years. Currently, pension trustees pay death benefits directly to beneficiaries without going through the probate process. From April 2027, pension scheme administrators will be brought into the IHT reporting and payment system. The estate will need to report the pension value to HMRC, and the scheme administrator will be liable for paying any IHT attributable to the pension funds. In practice this means: the personal representative (your executor) reports the total estate including pension, HMRC calculates the IHT split, and the scheme administrator pays the pension-attributable portion before releasing funds to beneficiaries. The consultation suggests a reporting window that aligns with the existing IHT timeline — broadly six months from end of month of death. If you have multiple pension providers, there will be coordination complexity. I'd flag this to anyone with older deferred pensions spread across three or four providers from different jobs: tidying those into one SIPP before 2027 may save your executors a significant administrative headache.
scenario one — the couple with a large SIPP and a house ¶
Margaret is 68 and widowed. Her estate consists of her home (£420,000), ISA savings (£85,000), and an undrawn SIPP (£380,000). Total estate: £885,000. Currently: the SIPP passes outside the estate. Her taxable estate is £505,000. She has one nil-rate band of £325,000 and the residence nil-rate band of £175,000 (she's leaving the house to her adult daughter). Taxable above thresholds: £505,000 minus £500,000 = £5,000. IHT bill: £2,000. From April 2027 under the new rules: the SIPP of £380,000 enters the estate. Total taxable estate: £885,000. Same thresholds apply: £885,000 minus £500,000 = £385,000 taxable. IHT bill: £154,000. That's a £152,000 change. The practical question for Margaret is whether drawing down more from her SIPP now — living off it deliberately, spending it on experiences, gifting within annual allowances, or making pension contributions for her grandchildren — makes more sense than leaving it to grow IHT-exposed inside the wrapper. There's no universal answer; it depends on her income tax rate in drawdown, her health, and what she actually wants to do with the money.
scenario two — the younger accumulator who planned to pass on the pension ¶
David is 52, still working, contributing heavily to a SIPP with £310,000 in it. He has a relatively modest non-pension estate — house with £120,000 equity, ISAs of £40,000. His strategy was explicit: draw on ISAs and cash in retirement, leave the SIPP untouched as a tax-efficient inheritance for his two children. Under the old rules this made good sense. Under April 2027 rules, that strategy no longer delivers the same outcome. His estate at death (say he dies at 75 with the SIPP grown to £700,000 and equity to £250,000): total estate £990,000. He has two nil-rate bands available if married and spouse predeceased him passing their unused band — let's say he's single, so just one: £325,000. No RNRB if the house is too small or he doesn't leave it to direct descendants. Taxable: £665,000. IHT: £266,000, much of it attributable to the pension. For David, the question becomes whether to rebalance his contributions strategy — perhaps using the pension for its income tax relief benefit in accumulation, but planning to draw it down more deliberately in early retirement before the estate grows too large. Pension contributions still make sense for the upfront relief; it's the accumulation-then-pass-on strategy that needs revisiting.
scenario three — the couple where the spousal exemption still does a lot of work ¶
Anita and James are both 71, married, both with SIPPs (Anita: £200,000, James: £150,000) and a jointly-owned home (£500,000 equity). If James dies first, his entire estate — including the pension — passes to Anita IHT-free under the spousal exemption. His unused nil-rate band (£325,000) transfers to Anita's estate. His unused RNRB (£175,000) also transfers. So when Anita later dies, she has £650,000 of nil-rate band and £350,000 of RNRB — £1,000,000 in total thresholds. Her estate at that point: house (£500,000) plus her own SIPP (£200,000) plus James's SIPP now in her name (£150,000) plus other savings — probably around £950,000 to £1,050,000 depending on investment growth and spending. She is right at the threshold. This scenario shows that for many married couples, the April 2027 change is uncomfortable but not catastrophic, because the spousal exemption does a lot of heavy lifting on the first death. The real exposure is on the second death, which is where planning — lifetime gifts, charitable bequests, structured drawdown — becomes valuable.
practical options worth thinking about now ¶
I want to be careful here not to pretend there are clean solutions, because most of the options involve genuine tradeoffs. That said, here are the levers that are actually worth examining with an adviser before April 2027: First, structured drawdown — deliberately taking pension income now (above what you need to live on) and either spending it, gifting it within annual gift allowances (£3,000 per year, plus the seven-year potentially exempt transfer rules for larger gifts), or moving it into ISAs where it sits outside the estate after seven years if gifted. Second, whole-of-life insurance written in trust — a policy that pays out on death to cover the IHT liability, without increasing the estate. It doesn't reduce the tax but it provides liquidity for beneficiaries who might otherwise have to wait for probate and pension administrator coordination. Third, charitable giving — bequests to registered charities reduce the taxable estate and, if the charitable bequest exceeds 10% of the net estate, can reduce the IHT rate on the remainder from 40% to 36%. For people with philanthropic inclinations, this just became more financially interesting. Fourth, reviewing nomination of beneficiaries — your pension expression of wishes currently matters mainly for speed and certainty of payment; from 2027 it won't affect IHT but may still affect income tax outcomes depending on who you nominate.
what I'd actually do right now ¶
If I had a pension pot above £100,000 and a total estate above £500,000, I would not wait until late 2026 to think about this. The most useful thing you can do today is get an accurate picture of your total estate including pension valuations — many people genuinely don't know what their old workplace pensions are worth. Request current transfer values from any deferred schemes. Then build a simple spreadsheet: assets, approximate liabilities, thresholds you can claim, and the pension on top. See where you land. If you're comfortably under the thresholds even with the pension included, the change may not affect you materially. If you're significantly over, you have time — but not unlimited time — to adjust the trajectory. The seven-year clock on potentially exempt transfers is relevant here: gifts made before April 2027 still start the clock running. I think the single most underused tool in this space is actually just intentional drawdown combined with gifting. It's not glamorous, it's not a scheme, but it works with the grain of what most people actually want (to help family now rather than leave a large estate later) and it's robust to future rule changes in a way that complex structures often aren't.
I'll update this note as HMRC publishes further technical guidance — there are still open questions around valuation dates and how defined benefit top-ups interplay with DC pots in hybrid schemes. If you're working through a specific situation and want a second set of eyes on the numbers, feel free to get in touch. I find these conversations genuinely interesting to think through, and I'd rather you stress-test your assumptions now than scramble in early 2027.