Technical Insight
Pensions and Inheritance Tax - practical client outcomes: Planning for April 2027
Following last month’s analysis of the upcoming Pensions and IHT reforms, we now focus on the real advice implications — client exposure, tax trade-offs and the growing importance of pension nominations.
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The inclusion of most pension death benefits within estates from April 2027 represents a fundamental shift in how advisers must think about pension wealth. What was once treated as a flexible, tax‑efficient legacy vehicle now requires the same level of scrutiny as other estate assets — particularly where beneficiaries, timing, and form of benefits are concerned.
In April’s article – Pensions and Inheritance Tax are about to change dramatically: preparing for April 2027 we looked at which pensions will be included or excluded from estates, how they are valued and the new estate management tools that will be available.
In this article we follow up with practical planning considerations, identifying different cohorts of client IHT exposure, integrating IHT and income tax planning, and look at the value of pension nominations.
Identifying which clients are exposed to IHT
Not all clients are affected equally. Larger impacts will fall on those where pension wealth forms a material part of overall net worth when added to their other estate assets.
Large defined contribution (DC) pots are an obvious starting point — particularly where the pension has until now been consciously preserved to pass to the next generation. In these cases, the change undermines a long‑standing assumption that pensions sit outside the estate and can be distributed with relative simplicity. International pensions introduce further complexity, layering UK IHT considerations on top of local tax treatment and potential reporting friction across jurisdictions.
Clients with large Defined Benefit (DB) pensions may face moderate changes as many death benefits from DB schemes are excluded benefits that won’t form part of the estate and therefore won’t add additional IHT burdens. However, DB schemes can vary, and some death benefits may not be excluded, so take time to understand the benefits available from all client pensions.
A review of client objectives can help ensure estate planning strategies and retirement strategies remain effective across different timeframes and possible outcomes. Some clients may require targeted behavioural changes, such as where:
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They hold substantial pension wealth that will overnight go from excluded from the estate to representing a significant IHT liability.
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They may not be exposed to IHT now, but future growth and frozen allowances could bring estates into scope.
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Pensions represent a moderate proportion of assets, requiring careful forward thinking and wider estate planning.
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Clients may already be well prepared for these changes, such as where pensions are already central to a client’s retirement planning. Over time, estate values may naturally decrease as pensions are drawn or annuities purchased. But for some, drawing on pensions brings additional income tax exposure that needs to be balanced.
Adviser tip
Remember, whilst the spotlight is on pensions, they will only form part of the overall estate, wider holistic planning is required to manage a clients IHT liability.
Forecast IHT exposure
Simply adding notional pension property values to the estate calculation understates the complexity of how benefits are assessed, taxed, and paid.
Fund choice and risk exposure can have direct inheritance tax and retirement consequences. Investment volatility at, or close to death could materially change the value exposed to IHT, introducing sequencing risk that advisers may previously have overlooked within a pension wrapper.
There are also practical trade‑offs. Assets intended to meet an IHT liability may need a different risk and liquidity profile from assets intended for long‑term beneficiary growth. De‑risking a pension to manage IHT volatility could conflict with estate planning objectives for younger or exempt beneficiaries. Advisers may need to consider aligning pension investment strategies with estate planning outcomes and beneficiary profiles.
Advisers should also consider how the valuation of notional pension property feeds into IHT calculations alongside the interaction with income tax when benefits are drawn — either during life or by beneficiaries after death.
Integrate client attitude to cross‑tax planning
Pension planning and estate planning cannot sit in silos. Decisions that reduce IHT exposure may increase income tax exposure, and vice versa; understanding and explaining these trade‑offs is now central to good advice.
For many clients, the most effective outcomes will come from balanced behavioural change — spending more, gifting earlier, or accepting a different balance between lifetime tax and estate efficiency.
Illustrating how pensions interact with the wider estate can help clients make informed decisions. This is where advisers can differentiate that the best outcomes rarely come from addressing IHT, income tax, pensions, and gifting in isolation.
For some:
- Drawing on pensions will increase income tax exposure, but then gifting the proceeds can reduce IHT exposure at 40% and also potentially reduce beneficiary income tax exposure.
- Where clients pay income tax at a lower rate than their beneficiaries, where death will be (or is expected to be) after age 75, it may be more efficient for the client to draw on their pension – especially if that can be gifted to reduce IHT exposure as well.
- Effective use of gifting – such as potentially exempt transfers subject to the 7 year rule, and gifts out of normal expenditure out of income which can be immediately outside of the estate where the conditions are met – can help to mitigate pension withdrawals accruing in the estate.
Adviser tip
Remember, pension death benefits are not always exposed to income tax. Where pension members die before age 75 the death benefits can usually be paid free of income tax through beneficiary drawdown. So balancing tax risks when drawing on pensions for wealth transfer purposes is crucial.
Review nomination forms thoroughly — they now drive IHT outcomes
Beneficiary nominations already provide a direct link between who benefits and enabling flexibility for beneficiary drawdown. From April 2027 nominations will also become a strategic IHT planning tool as certain beneficiaries such as a spouse or civil partner are exempt from IHT.
When reviewing nominations, advisers should consider:
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Are the beneficiaries still appropriate?
Life events such as divorce, remarriage, deaths, estrangement, or new dependants can quickly make nominations outdated.
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Would rebalancing toward exempt beneficiaries help client goals?
Consider whether this genuinely reduces IHT or simply defers or accrues IHT to a subsequent death.
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Is there scope to reshape benefits?
Do existing pensions allow dependants drawdown for greater control over income tax exposure?
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Nominations should always be reviewed alongside wills and wider estate planning. Poor alignment can lead to delays or disputes when settling IHT at the point clarity is most needed.
Adviser tip
Clients with long‑unchanged nominations are particularly exposed — not only to unintended beneficiaries receiving benefits, but also to unnecessary IHT and administrative friction.
Plan around administrative friction
Uncertainty over pension beneficiaries can delay settlement of the wider estate. Pension Scheme Administrators (PSAs) have up to two years from notification of death to decide who receives death benefits, while Personal Representatives (PRs) must settle IHT within six months to avoid interest. This mismatch can create friction, even where client intentions are clear.
Key issues include:
- PSAs may need to determine beneficiaries before PRs know the total IHT liability. Whether benefits are paid to exempt or taxable beneficiaries can significantly affect the estate’s IHT position.
- PRs may issue withholding notices to prevent pension benefits being paid out before it is clear whether funds are needed to meet IHT.
- Once IHT is established, PRs may need the PSA to settle part of the liability before remaining benefits can be distributed.
- In some cases, PSAs may pay benefits quickly, leaving PRs needing to recover funds from beneficiaries if pension assets were required for IHT.
- Each scenario can delay payments and prompt beneficiaries to chase PRs, advisers, or PSAs. Clear communication and helping PRs understand their obligations can help manage expectations and reduce disputes.
Adviser tip
Consolidating pensions into a single flexible scheme means that PR’s only have to liaise with a single scheme and provides flexibility for beneficiaries. However, care should be given to any protections and benefits in client pensions which may be lost on transfer, such as guaranteed annuity rates and scheme specific tax-free cash.
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Conclusion: a deeper, more rounded advice conversation
The changes taking effect from April 2027 require advisers to immediately engage more deeply with client intent, family dynamics, and the realities of pension death benefits. Those who treat pensions as an integral part of estate planning will be best placed to protect beneficiaries from both unnecessary tax and unexpected complexity. The value of advice, in this context, lies in making the future more understandable, manageable, and aligned with what clients actually want to achieve.
For further information and queries, please call one of our distribution team today, or refer to our TechVoice resources.
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