The £500,000 pension that became £180,000

Author: Shaz Bishop, Wealth Manager

Picture this from April 2027…

David Thompson spent 35 years building his pension pot. Through careful contributions and steady growth, he’d accumulated £500,000 by age 86 – enough to give his daughter Sarah a meaningful inheritance. When he passed away, Sarah received £180,000.

The remaining £320,000 was absorbed by two separate tax charges – an outcome that could have looked very different with the right planning in place.

Under the new rules coming into effect in April 2027, David’s pension would enter his estate and, assuming his allowances had been utilised, face 40% inheritance tax (IHT) of £200,000 on the £500,000 pension. Then, because David died after 75, Sarah is a higher rate tax payer and paid income tax at 40% on every withdrawal from what remained: a further £120,000. The combined effective tax rate on his pension: 64%.

This is what the rules, both new and existing, produce without a plan. From April 2027, unused pensions will count toward your estate for IHT purposes. According to government estimates, around 38,500 estates will face higher IHT bills as a result.¹ For David and Sarah, two separate consequences combined to make £320,000. But there’s a third, one that catches many families off guard.

One change. Three consequences.

Consequence one: Your pension enters your estate

Until now, your unused pension usually sat outside your estate for IHT purposes. As a couple, you could build a £1 million pension pot and pass it to your children with minimal tax. From 6 April 2027, that changes. Unused pensions become part of your taxable estate, facing 40% IHT on amounts exceeding your allowances.

The current thresholds remain in place: a £325,000 nil-rate band, plus a £175,000 residence nil-rate band if you’re passing your home to children, giving individuals up to £500,000 tax-free – or £1 million for couples. From April 2027, your pension counts toward those limits too. Understanding where you stand is the natural first step.

Consequence two: The post-75 income tax charge

The second consequence is an existing rule that will now affect far more families. If you die after age 75, your beneficiaries don’t just face IHT on your pension – they then pay income tax at their own marginal rate (20%, 40%, or 45% depending on their income) on the withdrawals they take on top. Until now, most people’s pensions sat outside the IHT net entirely, so the combined effect rarely applied. From April 2027, it will apply to many more estates.

In David’s case, having used up his available allowances, the estate paid 40% IHT on his £500,000 pension (£200,000) leaving Sarah with £300,000. Because David died at 86, Sarah, who is a higher rate taxpayer, also owed income tax at 40% on her withdrawals – a further £120,000. Net inheritance: £180,000 from a £500,000 pot.

For beneficiaries who are additional-rate taxpayers (45%), the combined effective rate reaches 67%.

Consequence three: The £2 million tipping point

There’s a third dimension that catches many people off guard. When your estate exceeds £2 million, you start losing the £175,000 residence nil-rate band – £1 for every £2 over the threshold. This rule already exists; what changes from April 2027 is that pensions, previously outside the IHT calculation, now count toward that total. Some families who have carefully structured their finances to stay under £2 million will find themselves over it.

Here’s what that can look like.

The Wilsons, a couple in their late 60s, had a joint home worth £950,000, investments of £600,000 and combined pension pots of £600,000. With pensions excluded from IHT calculations, their visible estate sat at £1.55 million – comfortably under the £2 million threshold. Their expected IHT bill: £220,000.

After April 2027, the picture changes. Add their pensions and the total estate reaches £2.15 million – £150,000 over the threshold. The final spouse will lose £75,000 of their residence allowance through tapering, pushing their IHT bill to £490,000. Their pension didn’t just face a direct 40% charge – crossing the £2 million threshold also cost them £30,000 by removing part of their residence allowance. Total additional IHT compared to their pre-2027 position: £270,000.

None of this is inevitable. The Wilsons’ position, like David’s, is exactly the kind of scenario where early planning can make a genuine difference.

Five things your wealth manager will work through with you

These changes are coming, but you’re not powerless. Here are five conversations to have with your wealth manager before April 2027.

1. Calculate your true estate value

Your wealth manager can run a full estate valuation with your pension included – many clients are surprised by what the total looks like. If your combined estate sits between £1.8 million and £2.5 million, you’re in the residence allowance taper zone. If you exceed £500,000 as an individual or £1 million as a couple, you’ll face IHT. Running these numbers with pensions included is the first conversation, and our cashflow planning tools make it straightforward to model different scenarios together.

2. Review your pension death benefit nominations

Your pension death benefits are not controlled by your will. They’re governed by a separate nomination form held by your pension provider – one that many people haven’t looked at in years. Your wealth manager can review your nominations alongside your wider IHT plan and flag anything that needs updating. If left blank or outdated, benefits may default to your estate, which is typically the worst outcome for tax purposes.

3. Consider taking your 25% tax-free lump sum

You’re usually entitled to withdraw 25% of your pension tax-free, subject to a maximum of £268,275 (this may be higher if you hold lifetime allowance protection). From April 2027, pension savings left undrawn will face IHT – and if you die after 75, income tax on top. Taking your tax-free cash now can reduce that portion from the risk of double taxation.

Your wealth manager can model whether taking your tax-free cash now makes sense given your estate position and income and gifting needs – particularly if you’re close to the £2 million threshold, where reducing your pension value could prevent the residence allowance taper from triggering entirely.

4. Explore protection assurance

A whole-of-life assurance policy written in trust – meaning the payout goes directly to your family, outside your estate – can cover the IHT bill without requiring you to draw down your pension early. Your wealth manager can help you understand whether a policy makes sense for your situation. The earlier you explore it, the better value it will be.

5. Speak to your wealth manager

The interaction between pension inclusion, the residence allowance taper and post-75 income tax is genuinely complex – and it’s personal. Your wealth manager knows your estate, your family, and your plans. Whether your exposure is straightforward or involves all three threats, they can work with a tax adviser to map what the changes mean for you and get you ready for April 2027.

The difference is planning

In David’s scenario, his daughter Sarah wishes she’d had this conversation with her father. She didn’t know to ask. He didn’t know there was a problem. One rule change – bringing pensions into the estate – set off a chain of consequences that reduced the amount she could inherit.

The most effective strategies need a good runway to work. The difference between a family that pays thousands more in tax and one that doesn’t isn’t luck, it’s effective planning.

Everyone’s estate is different. If any of this raises questions for you, speak to your wealth manager. We’ll walk you through exactly what the changes mean for your plans.

---

¹Inheritance Tax — unused pension funds and death benefits, HMRC, November 2025

---

---

---

---