The 2027 Pension Rule Changes | What They Mean for Your Will and Estate Plan

For many years, defined contribution pensions occupied a unique position in UK estate planning. Beyond providing income in retirement, pensions served as an exceptionally tax-efficient mechanism for passing wealth to the next generation. Historically, unspent pension funds generally sat outside an individual's estate for Inheritance Tax (IHT) purposes, meaning standard estate strategy often focused on preserving pension capital wherever possible while using other taxable assets during lifetime.

However, following tax changes set to take effect from 6th April 2027, unused pension funds and death benefits will be brought into the scope of Inheritance Tax.

For families reviewing their estate planning, this shift removes the automatic IHT shelter that pensions once enjoyed and introduces critical legal and structural questions for your Will and wealth succession plan.

Understanding the Shift

Under current legislation, passing on an unspent pension to beneficiaries rarely triggers an Inheritance Tax liability. If an individual dies before age 75, funds can usually be passed on tax-free; if death occurs after 75, beneficiaries pay tax only at their own marginal rate of Income Tax when drawing funds down.

From April 2027, including unused pension assets in the total value of an estate means many individuals who previously believed their estate fell within the £325,000 Nil-Rate Band (or £500,000 when including the Residence Nil-Rate Band) may find their estate subject to a 40% IHT threshold.

This regulatory change means pensions can no longer be evaluated in isolation - they must be fully integrated into your wider legal estate strategy.

Legal & Structural Considerations for Estate Planning

From a legal perspective, bringing pensions into the IHT estate creates several important areas to review:

1. Expression of Wish Forms vs. Your Will

Pension death benefits do not automatically form part of your estate under your Will; they are distributed at the discretion of the pension scheme trustees, guided by your Expression of Wish (or Nomination) form.

The Risk: If your nomination form names direct beneficiaries (such as adult children), bringing those funds into the taxable estate could create unexpected tax liabilities or skew the intended balance of inheritance between family members.

The Solution: Expression of Wish forms must be reviewed regularly alongside your Will to ensure your overall distribution strategy remains consistent and tax-efficient.

2. Trust Planning and Asset Protection

Where pensions once provided an informal "wrapper" for wealth preservation, formal legal trusts within your Will such as Discretionary Trusts or Life Interest Trusts may play a renewed role.

Trust structures can help control how assets are passed down to children or grandchildren, protecting capital against future risks such as divorce, bankruptcy or long-term care fee assessments.

For married couples or civil partners, structuring distributions to utilise spousal exemptions effectively can defer or mitigate potential tax burdens.

3. Lifetime Gifting Strategies

Clients evaluating how to manage their overall wealth profile in light of the 2027 rules may consider lifetime gifting to reduce the size of their taxable estate.

Potentially Exempt Transfers (PETs): Gifts made to individuals during your lifetime generally fall outside your estate for IHT purposes if you survive the gift by seven years.

Gifts Out of Normal Expenditure: Outright gifts made regularly from surplus income (which may include regular pension drawdowns, subject to income tax considerations) can be immediately exempt from IHT, provided they do not reduce your standard of living.

The Importance of Joined-Up Professional Advice

Deciding whether to retain, draw down or restructure pension assets is never purely a legal calculation nor is it purely a financial one.

While a Wills, Trusts and Probate solicitor assists with Will drafting, trust creation, estate structuring and tax mitigation strategies, decisions regarding pension withdrawals, investment vehicles and retirement income sequencing require regulated financial advice from an Independent Financial Adviser.

Achieving an effective outcome requires a collaborative approach between your legal adviser and your financial planner to ensure that tax efficiency is balanced with your personal security and long-term care needs.

How We Can Help

At Sills & Betteridge LLP, our Wills, Trust and Probate team regularly assists individuals, business owners and families with complex estate structures, Will drafting and future planning.

If you would like to review your Will, update your estate plan ahead of the 2027 tax changes, or discuss how trust structures can protect your family's wealth, please contact a member of our Wills, Trusts & Probate team in your local area.