Unused Pension Pots After 2027? Here’s What You Need to Know About Estate and Pension Planning

What’s Changing — and Why It Matters

Prior to last year’s Autumn Budget, much speculation centred around potential changes to the tax-free element of pensions. Many wondered whether the Government would make pension withdrawals taxable.

Instead, the Government has taken a different route.

From April 2027:

• Most unused defined contribution pensions (including SIPPs and personal pensions) will form part of your estate for IHT purposes.

• The Nil Rate Band (NRB) remains frozen at £325,000 per person until at least 2030.

• The Residential Nil Rate Band (RNRB) also remains unchanged.

• On second death, married couples or civil partners can typically pass on up to £1 million before IHT applies.

• Any value above available allowances will be taxed at 40%, unless exemptions apply (e.g., transfers to a spouse/civil partner or charity).

Previously, most personal pensions sat outside the estate and could be passed on tax-efficiently. That will no longer be the case.

A Real-World Scenario: Janet and David Hubbard

Let’s consider a fictional example.

Janet (60), a legal secretary, and David (63), an engineering manager, plan to retire in June 2027. Having recently inherited from their parents, they now want to:

• Secure their own retirement

• Understand how the new IHT rules affect their daughters

• Support their daughters in buying homes

• Protect as much family wealth as possible

Assets	Value
House	£500,000
Cars, personal effects etc	£100,000
Recent Inheritance	£200,000
Savings	£100,000
Combined personal pension value	£500,000
Total	£900,000 (£1,400,000 with pensions)

 

IHT pre April 27

Total allowance=£1m

Therefore, no IHT to pay as allowance is greater than asset value (+£100,000)

 

IHT post April 27

Total allowance=£1m

Assets now total £1.4 m

IHT to pay as asset value greater than IHT allowance.

Amount due is 40% of £400,000, so £160,000 on second death.

 

What Can Be Done?

There are several potential strategies Janet and David could consider:

Option A:
Do nothing and accept the higher tax liability.

Option B:
Distribute or spend £400,000 before April 2027 to reduce the estate value.

Option C:
Insure the liability using a Whole of Life, second-death policy written into Trust.

Option D:
Reduce the estate value through estate planning strategies such as a Discounted Gift Trust.

(This list is not exhaustive, and specialist advice is recommended for more complex planning options.)

The Key Question Is:

Will your pension still work the way you think it does after April 2027?

For Janet and David, planning has already begun. By working with their financial adviser now, they aim to:

• Retire at a time of their choosing

• Use their assets wisely

• Minimise unnecessary tax

• Ensure their wealth passes to their daughters as intended

The earlier you understand the impact of these changes, the more options you have.

Now is the time to review your estate and pension planning.

Written by Ross Mcfadzean, Chartered Financial Planner with Perspective (Brighter) 

ross.mcfadzean@pfgl.co.uk

• The information in this blog is for information only and must not be considered as financial advice​. 

• Past performance is no guarantee of future returns and the value of an investment may fall as well as rise.​ 

• Inflation will reduce the real value of the capital invested if returns do not match or exceed the rate of inflation.​ 

• We always recommend that you seek financial advice before making any financial decisions