Pensions and Inheritance Tax 2027: What the April Change Means for Your SIPP

From April 2027, pension inheritance tax in the UK changes fundamentally. Unused funds in defined contribution pensions, including SIPPs, will count toward the estate for inheritance tax purposes for the first time in 35 years. The October 2024 Budget introduced this measure. The Office for Budget Responsibility scored it as raising approximately £640 million per year by 2029/30. For any investor whose SIPP plus other estate assets exceed the nil-rate band of £325,000, this is the single most consequential pension planning change since pension freedoms in 2015.

How Pension Inheritance Tax 2027 Changes the SIPP Wrapper

For three and a half decades, the SIPP sat outside the inheritance tax calculation. On death before age 75, the pension passed to nominated beneficiaries completely free of tax. After 75, beneficiaries paid income tax on withdrawals at their marginal rate, but the pension itself avoided the 40% IHT charge that applied to other estate assets.

This structural advantage made the SIPP the most efficient wealth transfer vehicle available to UK investors. Many higher-net-worth pension holders deliberately preserved their pots rather than drawing them down, specifically because of this treatment.

From April 2027, that changes. The HMRC consultation published in August 2024 confirmed that unused defined contribution pension funds will be included in the deceased's estate for IHT purposes. The basic nil-rate band remains at £325,000 and the residence nil-rate band of £175,000 still applies where a residential property passes to direct descendants. But the pension pot now sits inside these thresholds, not outside them.

A person dying with a £400,000 SIPP, a £300,000 house leaving it to adult children, and £50,000 in other assets has a total estate of £750,000. Under current rules the pension is outside IHT. From April 2027, the same estate generates a liability on £250,000 at 40%, producing a £100,000 tax charge.

Who the Pension Inheritance Tax 2027 Change Affects Most in the UK

The change targets pension savers who accumulated large pots and drew little from them in retirement, using the pension as an estate planning vehicle rather than a retirement income vehicle. The HMRC August 2024 consultation is explicit: the pension system was not designed to provide an IHT shelter, and this pattern of behaviour has grown significantly since pension freedoms in 2015.

The IFS estimated in 2023 that pension wealth is the most unequally distributed form of wealth in the UK, with the top 10% of pension wealth holders owning 55% of total private pension assets.

Three categories of investors are most affected. First, anyone with a SIPP above £325,000 who expects to die with significant funds remaining in the pension. At a 4% withdrawal rate, a £1 million SIPP generates £40,000 per year of income.

An investor spending £30,000 per year, drawing State Pension and modest SIPP withdrawals, may die with £500,000 to £700,000 still in the pot. Second, investors who planned to pass pension wealth to children or grandchildren via the SIPP wrapper. Third, investors who are older and have not yet begun drawdown, with pots continuing to compound inside the wrapper.

How Pension Inheritance Tax Works in Practice from April 2027

The mechanics are still being finalised. HMRC ran a second consultation through early 2025. Several points are confirmed. The pension pot counts as a deemed transfer into the estate on death. The pension scheme administrator is responsible for reporting and paying the IHT charge to HMRC.

Beneficiaries receive what remains after the tax charge has been applied. The Society of Trust and Estate Practitioners (STEP) and Prudential both raised concerns in their consultation responses about administrative complexity, particularly for pensions held in discretionary trusts and for deaths where the SIPP holds illiquid assets.

One significant open question involves the interaction between the IHT charge and income tax. Under current rules, beneficiaries of pots from someone who died after 75 pay income tax on withdrawals at their marginal rate. A double-taxation problem arises if the estate also pays IHT on the same pot value at 40%.

The HMRC consultation proposed a relief mechanism but the exact form was unresolved in the August 2024 document. STEP and Fry Group have called for full income tax relief on funds that have already suffered IHT, consistent with how other inherited assets are treated in UK law.

The Pension Drawdown Question Before April 2027: Should You Draw Faster?

Drawing the pension faster means paying income tax on withdrawals now at the marginal rate, potentially 40% or 45%, potentially pushing income into higher tax bands, losing the compounding benefit on the drawn capital, and converting the pension into other assets where different taxes apply. The pension IHT charge applies at 40% above the nil-rate band. If an investor's marginal income tax rate on additional withdrawals is also 40%, accelerated drawdown and pension IHT produce the same effective rate. In that case, the compounding benefit of leaving the capital in the pension to grow is the determining factor over a 10 to 15 year horizon.

For investors with total estates well below the nil-rate band, the April 2027 change is irrelevant. For investors with estates significantly above the combined nil-rate bands of £500,000, accelerated drawdown into an ISA or onto estate-reducing gifts is worth modelling. The key number: money drawn from a pension and given away as a cash gift falls outside IHT after seven years if the donor survives. Money remaining in the pension from April 2027 sits inside IHT from day one of the new rules.

Strategies for Managing Pension Inheritance Tax in the UK from April 2027

Drawing to fill lower-rate tax bands. If taxable income from State Pension and other sources leaves room below the higher-rate threshold of £50,270, SIPP withdrawals up to that threshold incur only 20% income tax. Over five years of structured withdrawals, a significant transfer from pension to ISA can occur at basic-rate tax, substantially reducing future IHT exposure at 40%. The arithmetic is precise: paying 20% now versus 40% at death produces a 20-percentage-point saving on each pound moved in this way.

ISA maximisation alongside pension drawdown. Money moved from a SIPP into a Stocks and Shares ISA exits the pension IHT calculation immediately. The £20,000 ISA annual allowance, combined with modest additional pension withdrawals each tax year, allows a meaningful reduction in pension IHT exposure over five to ten years. Bennyhoff and Kahlenberg's Vanguard research (2012) on investment cost friction confirms that tax-efficient account selection produces compounding advantages that grow disproportionately over long time horizons — the principle applies equally to IHT-efficient account selection.

Spousal exemptions. Assets passing to a spouse or civil partner are exempt from IHT regardless of the April 2027 change. Married couples where the pension holder is likely to die first may benefit from naming the spouse as primary beneficiary rather than the children, allowing the surviving spouse to manage drawdown and ISA transfers with full knowledge of the changed rules. The surviving spouse inherits the pension outside IHT, then manages their own drawdown strategy to reduce the estate before the second death.

Gifts from surplus income. Where SIPP income combined with State Pension generates a surplus over actual living expenses, those surplus withdrawals given away as regular gifts from surplus income are immediately exempt from IHT under existing rules. HMRC's Inheritance Tax Manual at IHTM14231 sets out the conditions: the gifts must form part of normal expenditure, must come from income rather than capital, and must leave the donor with sufficient income to maintain their usual standard of living. This approach requires documentation and consistency but produces an immediate IHT reduction with no seven-year waiting period.

Frequently Asked Questions: Pension Inheritance Tax 2027 in the UK

Will my SIPP be subject to inheritance tax from April 2027?

Yes, if you die on or after 6 April 2027 with unused funds in a defined contribution pension including a SIPP, those funds will count toward your estate for inheritance tax. Whether tax is actually due depends on the total value of your estate relative to the available nil-rate band of £325,000, plus the residence nil-rate band of £175,000 where a residential property passes to direct descendants. If your total estate including the SIPP remains below these thresholds, no IHT is due.

How much inheritance tax will my beneficiaries pay on my pension after the 2027 change?

The IHT rate is 40% on the value of the estate above the available nil-rate bands. If your total estate including the SIPP is £800,000 and your combined nil-rate bands total £500,000, the IHT charge is 40% of £300,000, which is £120,000. The pension scheme administrator deducts this charge before passing the remaining pension to beneficiaries. The final amount received depends on the overall estate structure, existing nil-rate band usage, and any applicable reliefs including the proposed income tax relief for double-taxed funds.

Should I draw down my pension faster to avoid the pension inheritance tax 2027 change?

It depends on your total estate value, marginal income tax rate, and expected time horizon. If your total estate will remain below the combined nil-rate bands, accelerated drawdown is unnecessary. If your estate significantly exceeds the nil-rate bands, drawing pension income up to the basic-rate threshold and placing the proceeds into an ISA or giving them away as regular gifts from surplus income may reduce the long-term combined tax charge. Drawing £10,000 extra at 20% income tax costs £2,000 now. Left in the pension in an estate above the nil-rate band until death, the same £10,000 costs £4,000 in IHT at 40%. The income tax route saves £2,000 on that sum and you retain the money compounding in an ISA.

Does the 2027 pension IHT change affect ISAs?

No. Stocks and Shares ISAs and Cash ISAs were never exempt from inheritance tax, unlike pensions. The April 2027 change specifically closes the pension IHT exemption that has existed since 1986. ISAs are already within the estate for IHT purposes, so the change does not alter their treatment. Moving money from a SIPP to an ISA moves it from a newly IHT-liable wrapper to a wrapper that was already IHT-liable, but gains the additional benefit of income tax-free drawdown when the ISA funds are eventually withdrawn.

What is the most tax-efficient way to pass on pension wealth under the new pension IHT 2027 rules?

For most investors, the combination of drawing pension income up to the basic-rate threshold each year, paying 20% income tax rather than waiting for 40% IHT at death, maximising ISA contributions with the proceeds, using spousal exemptions, and making regular gifts from surplus income produces the lowest combined tax charge over a ten to fifteen year horizon. The optimal strategy depends on total estate value, other income sources, number and financial position of intended beneficiaries, and expected time horizon.

Should I put my SIPP money into a trust before April 2027 to avoid pension inheritance tax?

Putting pension assets into a trust before April 2027 is unlikely to be effective for most investors and carries its own tax risks. Pension death benefit nominations are legally separate from trust structures. The HMRC August 2024 consultation specifically addressed attempts to use discretionary trusts to circumvent the change, and the 2025 follow-up consultation included anti-avoidance provisions. Any significant transfer of pension assets into a non-pension trust structure may constitute a disposal with its own tax consequences. This area requires specialist legal and tax planning guidance specific to your circumstances.

Sources and Further Reading

HMRC Consultation: Inheritance Tax on Unused Pension Funds, August 2024, gov.uk/government/consultations. Office for Budget Responsibility, Autumn Budget 2024 Economic and Fiscal Outlook, obr.uk. STEP (Society of Trust and Estate Practitioners), Response to HMRC IHT Pension Consultation, October 2024, step.org. Institute for Fiscal Studies, Private Pension Wealth: Distribution and Tax Treatment, 2023, ifs.org.uk. HMRC Inheritance Tax Manual IHTM14231: Regular Gifts from Normal Expenditure out of Income, gov.uk. Bennyhoff, D.C. and Kahlenberg, F. (2012), Advisor Alpha, Vanguard Research. PLSA Retirement Living Standards 2024, plsa.co.uk.

About the Author

Alpesh Patel OBE is a hedge fund manager, Bloomberg TV alumnus, Financial Times author, and former Visiting Fellow at Corpus Christi College, Oxford. He is the founder of the Great Investments Programme, a quantitative, self-directed investing framework for UK SIPP and ISA investors at campaignforamillion.com.

Disclaimer: This article is for information and educational purposes only. It does not constitute financial guidance specific to your personal circumstances. Tax rules described reflect HMRC consultation documents as of April 2026 and may change before final legislation. Consult a qualified tax specialist for guidance tailored to your situation.