The end of intergenerational pension tax advantages?

18 June 2026

Tags Private client tax Private client services Insights

For years, pensions have been one of the most tax-efficient ways to pass wealth between generations. But from April 2027, that long-standing advantage is set to change.

New rules will bring pension savings into the scope of inheritance tax (IHT), potentially reshaping how individuals approach both retirement and estate planning. While the headlines sound dramatic, the reality is more nuanced and, importantly, something you can plan for now.

Why have pensions been so attractive?

Historically, pensions have offered a powerful combination of tax benefits:

Contributions often receive income tax relief
Growth within the pension is largely tax-free
Funds can often be passed on with minimal tax

In some cases, this meant wealth could move through generations almost entirely tax-free, especially where death occurred before age 75. Where death occurred after age 75, beneficiaries have had the option of deferring tax charges almost indefinitely. Assuming the right pension options were in place.

From a policy perspective, this was increasingly difficult to justify. Pensions were designed to fund retirement, not serve as a long-term estate planning vehicle. Bringing them into the IHT regime reflects a broader push by government to raise tax revenues and rebalance incentives.

How pension death benefits work today

When someone dies, their pension can usually be passed on in one of three ways:

Lump sum (paid out immediately)
Beneficiary drawdown (kept within a pension wrapper)
Annuity (guaranteed income for a beneficiary)

The tax treatment depends heavily on age at death:

Before age 75: funds can usually be passed on tax-free
After age 75: beneficiaries pay income tax at their marginal rate

These rules will still apply after 2027 — but with an additional layer of tax.

What changes in 2027?

From April 2027, pensions will:

Form part of your estate for IHT purposes
Potentially be taxed at up to 40% at the point of death
Still be subject to income tax when beneficiaries withdraw funds, where death is after 75

This means pension wealth could face two layers of taxation:

Inheritance tax on death
Income tax on access

In some scenarios, this could result in effective tax rates of 52% to 67% or more, depending on the wider estate and the beneficiary’s tax position.

Why this matters

For many years, the approach taken by many has been “Don’t touch your pension, use other assets first.” This view already has some challenges because, if death occurs after age 75, a beneficiary would be paying income tax on the funds received. Some pension members could still pay a lower rate of income tax than their beneficiaries.

But with pensions entering the IHT net, that approach is even less likely to be optimal.

If pension funds are likely to face both IHT and income tax, then:

Drawing income earlier may become more attractive
Using pension wealth during your lifetime may be more efficient
Using the pension funds to meet your expenses could unlock Inheritance Tax planning options in the rest of the estate

Put simply, pensions are shifting from a legacy planning tool back to what they were intended for: funding retirement.

Planning considerations you shouldn’t ignore

While every situation is different, there are several areas worth reviewing now:

1. Check your death benefit options

Not all pensions allow flexible ‘beneficiary drawdown’. If yours doesn’t, your beneficiaries could be forced into a tax-inefficient lump sum. You should consult with an adviser on how you can obtain this for your pension benefits.

2. Revisit your beneficiary nominations

Who inherits your pension, and when, can materially affect the tax outcome:

Passing to a spouse may defer IHT, but create latent income tax charges
Skipping a generation could preserve certain income tax advantages, but create an immediate IHT charge after April 2027

3. Think about when to take tax-free cash

If unused, tax-free cash could effectively be lost on death after age 75. Taking it earlier may open up gifting or planning opportunities. However, this should be considered alongside the positioning of the rest of your estate. Taking tax free cash before April 2027 could increase your Inheritance Tax liability in the short term.

4. Consider drawing income earlier

Paying 20% or 40% (or slightly more for Scottish taxpayers) income tax during your lifetime may be preferable to beneficiaries facing higher combined rates later. This could also create other interesting IHT planning options for the rest of your estate.

5. Use gifting strategically

With more wealth potentially exposed to IHT, lifetime gifting becomes a powerful tool. In particular:

Regular gifts from surplus income can be immediately exempt from IHT
Larger gifts may fall outside your estate after seven years
Charitable donations could reduce the tax liability and leave funds to endeavours that are important to you. All while having a greatly reduced impact on what your beneficiaries could receive after tax

6. Review your will and expression of wishes

Many wills were drafted when pensions sat outside the estate and the inclusion of an unused pension fund will change the dynamic of where inheritance tax is due from. The pension will take up a share of the nil rate band available to a deceased individual’s estate which can change which beneficiary is suffering the inheritance tax, or reduce the amount received by some beneficiaries.

Pensions are still to be directed by the Expression of Wishes (EOW), not the Will. However, with different beneficiaries being possible between the Will and the EOW, it is important that these are reviewed as part of your overall plan and aims.

Practical challenges to be aware of

The introduction of pensions into IHT means that:

Executors will need to coordinate with pension providers quickly, in a relatively short timescale.
More estates may breach the £2m threshold, causing them to lose the Residence Nil Rate Band of £175,000 and increasing effective tax rates.
Administration will become more complex and time sensitive.
Consideration may be needed on how any 10% allocation of the net estate to charity is met in order to reduce the IHT rate to 36%.

A shift, not a setback

Despite the headlines, pensions are still tax-efficient in many cases. They offer attractive tax reliefs on contributions, tax free growth within the fund and 25% tax free on retirement. The key difference is how they should be used.

Rather than avoiding pensions, the focus should now be on using them more strategically:

Understand your retirement income needs
Identify any surplus
Plan how and when to draw or transfer wealth
Consider how beneficiaries could use inherited pension funds tax-efficiently

Get in touch

With the April 2027 changes on the horizon, now is the time to get ahead. If you’d like to understand how these changes could affect your personal situation, please get in touch to speak to one of our financial planners.

Get in touch

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