Pensions and IHT from 6 April 2027: Does the Planning Equation Still Work?
From 6 April 2027, most unused pension funds and relevant pension death benefits will be brought into the deceased’s estate for inheritance tax purposes. For many high net worth clients, this fundamentally changes the lifetime tax analysis of pensions.
The relief on the way in remains valuable. The tax-advantaged investment treatment remains valuable. The normal tax-free cash rules remain valuable, subject to the individual’s available allowances. But the historic ability, in many cases, to pass unused pension benefits outside the estate for IHT purposes is being removed.
For many HNW clients, pensions will still make excellent sense. However, the analysis is changing, particularly for older clients with substantial pension wealth who do not expect to use it during their lifetime. The contribution decision, the drawdown decision and the beneficiary planning decision now need to be considered together.
The historic pension equation
Before considering the change, it is useful to be clear about what pensions traditionally delivered for HNW clients.
Tax relief on contributions
For a higher-rate taxpayer, a gross pension contribution of £60,000 could generate £24,000 of income-tax relief, producing an effective net cost of £36,000, assuming the individual has sufficient relevant earnings and tax liability.
For an additional rate taxpayer, the effective net cost could be approximately £33,000, assuming the full contribution benefits from 45% relief.
For clients with adjusted net income between £100,000 and £125,140, pension contributions can also restore some or all of the personal allowance. This creates an effective marginal relief rate of up to 60%, assuming the contribution is correctly structured and the individual has sufficient income-tax liability.
This remains one of the most valuable pension-planning opportunities available to clients in that income range.
Tax-advantaged investment growth
Pension investments are generally not subject to income tax on investment income or capital gains tax on disposals within the pension. This can produce a substantial long-term advantage compared with holding the same investments in a taxable account, although the precise benefit depends on the assets, investment returns, use of allowances and the client’s wider tax position.
The advantage is not that all pension withdrawals are tax-free. It is that tax is generally deferred until benefits are taken, with the potential for a tax-free lump sum and the ability to control the timing and level of taxable withdrawals.
Tax-free cash
Most clients can normally take up to 25% of their pension benefits tax-free, subject to their available Lump Sum Allowance. The standard Lump Sum Allowance is generally £268,275, although transitional calculations and protected allowances can alter the position.
The Lump Sum Allowance should not be confused with the Lump Sum and Death Benefit Allowance. The latter is generally £1,073,100 and applies to specified lump sums and lump sum death benefits. It is not a general cap on pension wealth, nor does a pension fund exceeding that amount automatically remove the client’s entitlement to tax-free cash.
Tax on withdrawals
Amounts taken above the available tax-free cash are generally subject to income tax at the client’s marginal rate. Through flexi-access drawdown, phased crystallisation and other planning techniques, clients can often control the timing and amount of taxable withdrawals.
For HNW clients with rental income, dividends, business income or other investment income, pension withdrawals need to be modelled alongside the rest of the client’s income. The correct strategy may involve using pension withdrawals in low income years, deliberately filling lower tax bands or coordinating withdrawals with business sales and other liquidity events.
Death benefits
Before the reform, unused pension benefits were generally outside the estate for IHT purposes where the relevant scheme and death benefit rules applied. For deaths before age 75, beneficiaries could generally receive pension benefits without income tax, subject to the form of benefit and the applicable allowances. For deaths after age 75, beneficiaries generally paid income tax at their own marginal rate when benefits were drawn.
That combination of income-tax relief on contributions, tax-advantaged investment growth and favourable death-benefit treatment made pensions particularly effective as intergenerational planning vehicles.
The final characteristic is the one that is changing.
What changes from 6 April 2027?
From 6 April 2027, most unused pension funds and relevant pension death benefits will generally be included in the deceased’s estate for IHT purposes. The reform does not impose a flat 40% charge on every pension fund. The actual liability will depend on the estate’s available nil-rate bands, residence nil-rate band, spouse or civil-partner exemptions, charitable exemptions and other applicable reliefs.
The prevailing marginal IHT rate is generally 40%, but the pension fund may not bear that rate in every case.
There are also important exclusions and special rules. For example, certain death in service benefits and some continuing pension benefits are treated differently under the reform. The precise outcome depends on the type of scheme, the form of benefit and the beneficiary arrangements.
The reform therefore does not abolish the income tax or investment tax advantages of pensions. It changes the estate planning treatment of unused benefits on death.
The practical consequence is that pensions move from being a highly tax advantaged accumulation and succession vehicle to being primarily a tax efficient lifetime retirement vehicle, with less certain advantages for retaining large unused balances for beneficiaries.
The new lifetime tax equation
Consider a gross pension contribution of £60,000 made by a 40% taxpayer.
Gross pension contribution: £60,000.
Approximate net cost after 40% tax relief: £36,000.
Value after 20 years at a 5% annual real return: approximately £159,000.
Tax-free element at retirement: potentially up to £39,750, assuming sufficient Lump Sum Allowance.
Remaining 75%: £119,250.
After 40% income tax on the taxable element: approximately £71,550.
Total net value received during retirement: approximately £111,300.
The precise outcome depends on the client’s available allowances, tax rates, investment returns and withdrawal method. However, the basic relief in, tax advantaged growth and taxable withdrawal analysis remains broadly intact.
The difference arises if the client dies with some or all of the pension remaining.
Under the pre-2027 regime, the residual pension would generally have been outside the estate for IHT purposes. Under the post-2027 regime, it will generally be included in the estate calculation. IHT may therefore arise before beneficiaries receive the benefits, with income tax potentially applying separately depending on the member’s age at death, the form of benefit and the beneficiary’s own tax position.
This can create a significant additional tax cost for clients who accumulate substantial pension wealth, but expect to fund their retirement from other assets.
When contributions still make sense
The IHT reform does not make pension contributions unattractive across the board. There remain many circumstances in which pension funding is highly compelling.
Clients in the 60% effective rate band
For clients with adjusted net income between £100,000 and £125,140, pension contributions can restore the personal allowance and generate effective marginal relief of up to 60%.
If the pension is subsequently drawn at a lower marginal rate during retirement, the lifetime tax benefit can remain substantial. The analysis is particularly strong where the client expects to use the pension during their lifetime rather than leave most of it as a death benefit.
Clients with a clear retirement funding requirement
If the client expects to use the pension to fund retirement, the IHT treatment on death may have limited relevance to the contribution decision.
The client still benefits from tax relief on the contribution, tax advantaged investment growth and the ability to take an element as tax free cash. In these cases, the main question remains how much should be contributed, when benefits should be taken and at what marginal tax rates.
Clients with carry forward available
For 2026/27, an individual may potentially contribute up to £240,000 using the £60,000 current year annual allowance and full unused allowances from 2023/24, 2024/25 and 2025/26, assuming the relevant conditions are satisfied and the individual has sufficient relevant earnings or qualifying employer contributions.
The 2023/24 allowance expires at the end of 2026/27. From 2027/28 onwards, the relevant three-year window will move forward. The maximum is not automatically £240,000, it depends on the individual’s actual unused allowance, tapered annual allowance position, pension input history and relevant earnings.
For clients with unusually high earnings, bonuses, business sale proceeds or an equity event, carry forward can remain a valuable planning opportunity. It should, however, be used deliberately rather than simply maximised because of the headline limit.
Clients using employer contributions or salary sacrifice
Employer pension contributions can be especially efficient where they are funded through salary sacrifice.
The employee may save employee NIC at the applicable rate, generally 8% below the Upper Earnings Limit and 2% above it, and the employer may also save employer NIC. The employer’s treatment of any NIC saving is important as some employers pass part or all of that saving into the pension, while others retain it.
This advantage is separate from the 2027 IHT reform.
However, clients and advisers should also keep the later salary sacrifice changes under review. The government has announced that from April 2029 the amount of pension salary sacrifice exempt from employee NIC will be capped at £2,000 a year.
Clients below their available lump sum limits
For clients with sufficient available Lump Sum Allowance, the ability to take up to 25% of benefits tax free remains valuable.
The relevant question is not whether the pension fund is below or above £1,073,100. Advisers should instead review the client’s individual Lump Sum Allowance, previous crystallisations, transitional certificates and any protected rights.
When the equation becomes less attractive
The reform is most likely to change behaviour where the client’s principal objective is not retirement funding, but intergenerational wealth transfer.
Older clients with substantial unused pension wealth
Consider a 70 year old client with a £1.5 million pension who intends to fund their lifestyle primarily from ISAs, investment accounts or business assets and leave the pension untouched for beneficiaries.
Under the historic rules, retaining the pension could have been highly effective. After 6 April 2027, the pension will generally form part of the estate for IHT purposes. The case for preserving the pension indefinitely is therefore weaker.
The client may need to compare:
drawing pension benefits during life
using available lower tax bands
preserving assets with more favourable succession characteristics
making lifetime gifts
using normal expenditure out of income
reviewing spouse or civil partner planning, and
considering whether any retained business or agricultural assets qualify for relief.
The right answer will depend on the client’s whole balance sheet, not simply the pension value.
Clients near their lump sum limits
Clients approaching their available Lump Sum Allowance may receive less incremental benefit from further pension funding because additional contributions may not generate a corresponding increase in tax free cash.
This does not automatically mean that further contributions are inappropriate. Tax relief, employer contributions, salary sacrifice and the client’s expected retirement tax rate may still make them attractive. But the analysis should distinguish between:
tax relief on the contribution
tax advantaged investment growth
tax free cash
income tax on withdrawals, and
IHT on benefits retained at death.
Clients who do not expect to use the pension
The strongest case for reassessment is often not a particular pension value but a mismatch between pension funding and expected lifetime expenditure.
If a client has more than enough non-pension wealth to fund retirement and intends to preserve the pension for beneficiaries, the post-2027 IHT treatment may materially alter the optimal contribution and drawdown strategy.
Carry forward from 2026/27 onwards
The 2023/24 annual allowance is the first year that will drop out of the carry-forward window at the end of 2026/27.
A client who has unused allowance from 2023/24 may therefore need to use it by 5 April 2027. The amount available should be calculated from the client’s actual annual allowance for each year, rather than assuming that every year provides £60,000.
The calculation may be affected by:
tapered annual allowance
defined-benefit pension input
earlier contributions
employer contributions
relevant earnings
the MPAA, and
transitional rules.
The headline £240,000 figure is therefore best described as a possible maximum, not a universal entitlement.
Other interactions
Tapered annual allowance
For 2026/27, the tapered annual allowance can apply where threshold income exceeds £200,000 and adjusted income exceeds £260,000. The annual allowance can taper down to a minimum of £10,000.
Pension contributions can affect the threshold income calculation in some circumstances. This means that clients around the gateway levels require a detailed calculation rather than a simple assumption that their allowance is tapered.
For executives and business owners with income around the relevant thresholds, the contribution itself may be part of the solution, but the result depends on the precise composition of income and the applicable calculation.
Money Purchase Annual Allowance
Clients who have flexibly accessed a defined contribution pension may trigger the Money Purchase Annual Allowance. Once triggered, the limit on future money purchase contributions is significantly lower and the normal carry forward rules cannot be used to increase the MPAA for defined-contribution contributions.
Clients who remain in the accumulation phase should therefore understand the consequences before taking taxable flexible benefits.
Business Property Relief and Agricultural Property Relief
For clients considering the preservation of business or agricultural assets as part of succession planning, the position also changed from 6 April 2026. Full 100% relief is subject to a combined £2.5 million allowance, with different treatment applying to qualifying value above that limit.
It is therefore no longer sufficient to describe BPR qualifying assets as simply “IHT free”. The relevant asset, ownership structure, allowance, holding period and interaction with the rest of the estate must be reviewed.
Drawdown sequencing
The historic planning principle was often to spend taxable assets first and preserve the IHT-efficient pension for beneficiaries.
That principle may now be reversed in some cases. Drawing pension benefits during the client’s lifetime, particularly in lower tax years, may be preferable to leaving a large unused pension exposed to IHT on death while preserving other assets for beneficiaries.
However, the result should be modelled against:
the client’s income-tax bands
the personal allowance
ISA and taxable investments
investment bonds
capital gains
lifetime gifting
spouse or civil partner planning
BPR and APR
expected longevity, and
beneficiary tax rates.
There is no universal “pension first” or “pension last” rule.
What should HNW clients do now?
Three questions should be addressed before making a major contribution or changing an existing drawdown strategy.
1. Has the contribution been tested against the post-2027 rules?
The client should understand the net tax relief received, the likely tax rate on withdrawals, the expected investment period and the probability that the fund will remain unused at death.
A contribution can still be highly attractive even where IHT may ultimately apply. The important question is whether the combined lifetime and death tax outcome is better than the realistic alternatives.
2. Is carry forward being used deliberately?
Clients with unused 2023/24 allowance should consider whether it should be used before 5 April 2027, particularly where they have an unusually high income year.
The contribution should be based on actual allowance, earnings, liquidity and long-term objectives, not simply the desire to use a headline £240,000 figure.
3. Are beneficiary nominations and scheme arrangements up to date?
Beneficiary nominations should be reviewed in light of the client’s family circumstances, estate plan, intended beneficiaries and the post-2027 IHT framework.
The review should also consider:
whether the nomination remains aligned with the will and wider estate plan
whether a spouse, civil partner, children or discretionary arrangement is appropriate
how the benefits may be taken
the beneficiary’s marginal tax rate
the client’s age and health
any scheme-specific restrictions, and
whether the client’s drawdown strategy remains appropriate.
Conclusion
The 6 April 2027 pension IHT reform does not make pensions redundant for HNW clients. Tax relief on contributions, tax advantaged investment growth, tax free cash within the available allowance and flexible retirement income remain powerful planning features.
What changes is the treatment of unused pension wealth on death. For clients who expect to spend their pension during retirement, the contribution case may remain very strong. For clients who are accumulating pensions primarily as an intergenerational wealth transfer vehicle, the analysis is materially different.
The right response is not to stop pension contributions automatically. It is to separate three decisions that were often treated as one:
whether to contribute
when to draw the pension, and
who should ultimately receive the remaining benefits.
For many HNW clients, pensions will remain one of the most efficient long-term retirement planning vehicles available. But from 6 April 2027, the best strategy will increasingly depend on integrating pension planning with IHT, investment, gifting, business relief and family succession planning.