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For the past two decades, pensions have occupied a uniquely privileged position in estate planning. Unlike most other assets, an unspent defined contribution pension pot passed on death fell entirely outside the scope of Inheritance Tax. For many affluent families, the pension had quietly become the single most tax-efficient vehicle not just for retirement income, but for wealth transfer across generations.
That position is changing. The October 2024 Budget confirmed that, from April 2027, unused pension wealth will be drawn into a deceased person’s estate for Inheritance Tax purposes. The announcement has significant implications for how HNW clients approaching retirement should think about the order in which they draw on their assets and, more broadly, how they structure their estate.
The Second Pensions Commission’s interim report, published in May 2026, adds important context. It documents a UK in which wealth inequality between generations is widening, housing wealth held by the over-60s has reached £3 trillion, and pension pots are growing larger and more consequential as a share of total estate value. The combination of that wealth concentration and the new IHT treatment of pensions makes this one of the most pressing planning questions for clients in the decade ahead.
What is changing, and when
The current rules and the incoming changes can be summarised as follows.
The spousal exemption is an important and widely misunderstood point: assets passing between spouses on first death remain free of IHT. The change bites on the second death — when the combined pot, now potentially augmented by whatever the surviving spouse inherited, passes to children or other beneficiaries. For couples with substantial pension wealth on both sides, this requires careful modelling.
It is also worth noting that defined benefit (final salary) pensions operate differently, and the changes affect primarily those with defined contribution pots — the self-invested personal pension, workplace DC scheme, or personal pension most common among our clients.
Why this matters more than headlines suggest
The political case for the change draws on exactly the data the Second Pensions Commission has been assembling. The Commission highlights that pension tax relief disproportionately benefits higher earners: 15% of taxpayers receive 55% of all Income Tax relief on pension contributions. A system that then allows those same individuals to pass their unspent pot to the next generation free of IHT was, in the Commission’s framing, difficult to justify on grounds of fairness.
The Commission also notes that the volume of future bequests in the UK is projected to double, and that the median inheritance as a share of lifetime earnings is rising with each successive generation — from 8% for those born in the 1960s to 14% for those born in the 1980s. Inheritances are becoming a larger and more consequential source of wealth, but receipt is highly unequal: substantial inheritances are disproportionately concentrated among already financially advantaged households.
A planning problem hiding in plain sight
The Commission’s research found that 1 in 5 people incorrectly believe their pension automatically transfers to their next of kin on death. A further 35% of 65–75 year olds who had not received financial advice had never nominated a death beneficiary at all. And 84% of non-advised individuals in couples did not know whether their partner had nominated them as a beneficiary.
These figures are concerning in their own right. Under the incoming rules they become more so, because the identity and tax position of a beneficiary and crucially, whether a nomination is current and clearly recorded with the scheme, will directly affect the IHT and income tax outcome on death.
“The pension has long been the most tax-efficient vehicle in an estate plan. From April 2027, it becomes one that requires active management — not just in retirement, but throughout it.”
The decumulation sequencing question
One of the most immediate practical consequences of the IHT change concerns the order in which you draw on your wealth in retirement. Under the old rules, there was a strong argument for spending other assets first: ISAs, savings, property proceeds and leaving the pension intact as long as possible, both to compound tax-free and to pass to beneficiaries outside the estate. That argument is now considerably weaker.
In broad terms, the change in rules means that for many clients approaching retirement, drawing down the pension earlier, or at least more proportionately alongside other assets, will often make more sense than it did before. But this is highly individual. The right sequencing depends on your income tax position in retirement, the likely tax position of your beneficiaries, the size of your total estate relative to the nil-rate band thresholds, and whether your spouse holds substantial pension wealth of their own. It is not a decision that can be made by rule of thumb.
The interaction with housing wealth
The Commission documents a generation of over-60s holding record levels of housing wealth — £3 trillion in aggregate. Many of our clients hold the majority of their wealth in two forms: a pension and a property. Under the old rules, the pension was IHT-free; the property was not (subject to the residence nil-rate band for qualifying estates). From April 2027, both are potentially in scope.
This shifts the planning conversation. The residence nil-rate band — currently £175,000, and subject to tapering on estates above £2 million — is a valuable but limited relief. For clients whose combined pension, property, and other assets take them well above the effective nil-rate threshold, the IHT exposure on second death can be material. The interaction between the new pension rules and existing property holdings therefore needs to be considered together, not in isolation.
Approaches that clients are exploring include lifetime gifting strategies (subject to the seven-year rule), the use of trusts, charitable giving, and where appropriate, reviewing whether it makes sense to begin drawing pension income earlier than originally planned in order to reduce the size of the pot on death. None of these is straightforwardly “the answer”; each has costs and trade-offs that depend on individual circumstances.
What is not changing
Amid the noise, it is worth being clear about what the April 2027 rules do not affect. The tax treatment of pension income in drawdown remains unchanged. Income drawn from a pension continues to be taxed at the recipient’s marginal rate. The 25% tax-free lump sum (Pension Commencement Lump Sum, capped at £268,275) is unaffected. The spousal exemption on first death remains in place. And defined benefit pension income, which pays out as a regular income rather than a pot, is largely outside the scope of these changes.
What is changing is the estate planning logic that has, for many clients, made the pension the default “last to touch” asset. That logic no longer holds in the same way, and planning should be adjusted accordingly.
This is issued by IPS Capital LLP of 4 Eastcheap, London EC3M 1AE; a limited Liability Partnership registered in England OC328405 and authorised and regulated by the Financial Conduct Authority. It is issued in the UK only. This publication does not constitute advice and is for information purposes only. You should not make any investment decision based on this information alone. The information contained herein is correct to the best of our knowledge and we may not be held liable for any errors or omissions. This information is based on current information in respect of UK Pensions. IPS Capital LLP does not offer tax advice and you should seek professional tax advice for your own circumstances. The value of investments can fall as well as rise and you may not receive back the full amount of your original capital.
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