Families who have treated pensions as a tax-efficient way to pass on wealth could be caught by a major inheritance tax change unless they review their plans before retirement.
From April 2027, most unused pension pots will be included in someone’s estate when inheritance tax is calculated.
That means money which has often sat outside the inheritance tax (IHT) net could push more estates over the threshold, or leave beneficiaries facing a larger bill.
The change is especially relevant for people in their 50s, when retirement is close enough to plan with more confidence, but there is still time to rethink pension contributions, withdrawals, gifting and who should inherit what.
What is changing?
The new rules will be particularly important for people with defined contribution pensions, where money is built up in an invested pot, and for those who have moved pension savings into drawdown but not spent them.
Rachel Vahey, head of public policy at AJ Bell, says: “From April 2027, any unused pensions will be included in someone’s estate when working out inheritance tax.
“This will most likely affect those people who have defined contribution pensions where they are yet to access their pension money or where they have already taken a cash lump sum and moved the remainder into drawdown.”
Money left to a spouse or civil partner will still normally be free from IHT.
The risk is more likely to arise where pension funds pass to children, grandchildren, unmarried partners or other beneficiaries who are not exempt.
Why your 50s are becoming crucial
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For many savers, IHT feels like something to think about much later. But advisers say the 50s can be an important planning window – because retirement is close enough to make the numbers meaningful, but there is also still time to adjust savings habits.
Zoe Brett, financial planner at EQ Investors, says: “Your 50s represent a key period for fine tuning your financial planning. It’s likely to be a period where liabilities have reduced, your earnings are at a peak and any children are self-sustaining adults.”
This does not mean pension savers should make rushed withdrawals.
Pensions remain one of the most tax-efficient ways to save for retirement, with tax relief on contributions, tax-free investment growth and the option to take part of the pot tax-free from the minimum pension age.
But, Vahey says, that makes planning even more important. “Their pension money is there to give them an income for the rest of their life. So they need to make sure they leave themselves with enough money to live on.”
The old pension strategy may need a rethink
Under the current rules, many retirees have been encouraged to spend cash savings and ISAs first, while preserving pensions for later life or inheritance.
That logic may change once unused pensions become part of the estate for IHT.
Vahey says: “At the moment, pensions don’t count within the estate for inheritance tax. So it currently makes sense to use other savings and investments for income in retirement, and leave pension income until last. But once the new rules come in this will change.”
There is another possible tax hit.
If someone dies aged 75 or over, beneficiaries may also pay income tax when they withdraw inherited pension money.
How much could families lose?
The sums can be significant.
AJ Bell gives the example of a widow who dies aged 73 with an unused pension pot of £100,000, where £20,000 of nil-rate band is allocated to the pension.
In that case, £80,000 of the pension would be subject to inheritance tax, creating a £32,000 bill.
In a larger example, a divorced woman dies aged 88 with a £500,000 drawdown pension and £100,000 of nil-rate band allocated to the pension.
If the remaining £400,000 is subject to inheritance tax at 40 per cent, the bill would be £160,000. The remaining £240,000 could then pass to her beneficiary, who may also face income tax when making withdrawals.
What to check now
The first step is to understand what pensions you have, who is nominated to receive them when you die, and how they fit with your will. Pension death benefit nomination forms should be reviewed after divorce, remarriage, bereavement or the birth of grandchildren.
People in their 50s may also want to consider whether they are building up more pension wealth than they are likely to need, whether future savings should be split differently between pensions and ISAs, and whether affordable gifting could reduce the eventual estate.
For those with larger pension pots, complex families or significant non-pension assets, regulated financial advice can help model whether gifting, trusts, protection policies or a different retirement income strategy could reduce the risk of an avoidable tax bill.
The key is not to let tax planning override the purpose of the pension itself. It is there first to fund retirement. The trap is assuming the old rules will still apply when the next generation inherits what is left.
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