Strategic Estate Planning: Navigating the 2027 Pension Inheritance Tax Reforms

The inclusion of most unused pension funds and death benefits within the inheritance tax (IHT) regime from 6 April 2027 marks a significant change in UK private client planning. For many years, pensions have been viewed not only as retirement provision but also as an efficient vehicle for intergenerational wealth transfer. That assumption will no longer hold in most cases.

For advisers, the practical consequence is that pension planning must now be considered alongside mainstream estate planning, lifetime gifting strategies and liquidity management. The focus is no longer simply on preserving pension wealth within the wrapper for as long as possible. Instead, the question is whether retaining funds in the pension remains the most effective course once IHT exposure, income tax leakage and administrative complexity are assessed in the round.

In a previous article, Estate Planning in a Post 2027 Landscape: Rethinking Pensions as an Inheritance Tool, we explored the operation of the new rules and their likely impact on estates, beneficiaries and the administration of pension death benefits. This article takes the next step, in which we examine some of the planning strategies and practical responses that individuals, families and their advisers may wish to evaluate before the reforms take effect on 6 April 2027.

Reassessing the role of pension nominations

A review of pension nominations remains the natural starting point. Although the new regime materially reduces the historic IHT advantages associated with discretionary pension death benefits, an important exception remains: where death benefits are paid to a surviving spouse or civil partner, generally, they should continue to qualify in full for the spouse or civil partner exemption from IHT. Accordingly, where the intention is for no IHT to arise on first death, advisers should ensure that nominations are updated so the spouse or civil partner is clearly identified as the intended beneficiary.

In general and in practice, many clients may not have reviewed their nominations for a considerable period, despite significant changes in personal circumstances such as marriage, divorce, cohabitation, or the arrival of children from different relationships. Advisers should not assume that existing nominations remain appropriate.

Using pension nominations to access the 36% IHT rate

A reduced 36% IHT rate can apply where at least 10% of the net estate is left to charity, a relief traditionally achieved through proportionate charitable legacies in the Will. For those aiming to secure this reduced rate, it is now significant that pension death benefits will fall within the general component for IHT.

Individuals may therefore consider nominating pension benefits to charity in concert with their Will to help meet the 10% charitable threshold. However, this interaction between pension nominations and testamentary gifts will make drafting more intricate, as both must be aligned to achieve the desired percentage.

Evaluating lifetime drawdowns as part of IHT planning

For clients with substantial pension balances, increased drawdown is likely to become a more prominent feature of IHT planning discussions. The rationale is straightforward – reducing the value of the residual pension fund before death may lessen the amount brought within the IHT net.

However, simply withdrawing funds does not in itself improve the IHT position. Extracted cash must be spent, gifted or otherwise removed from the estate, or else it will remain fully chargeable to IHT in the same way as before. Advisers will therefore need to assess the interaction between a number of factors, including the client’s marginal rate of income tax on withdrawals, the client’s life expectancy and anticipated spending requirements, and the scope for further planning once funds have been extracted.

For some clients, particularly those who are likely to die after age 75, where beneficiaries may face income tax when drawing inherited pension funds in addition to IHT on the underlying value, as well as those with other secure sources of income, a phased drawdown strategy may now represent a more effective approach than leaving pension funds untouched.

Using surplus income gifting more deliberately

Where pension withdrawals exceed a client’s personal expenditure requirements, advisers should consider whether a programme of regular gifting can be structured so as to fall immediately outside the estate under the gifts out of surplus income IHT exemption.

This exemption is likely to assume greater importance in the pensions context, as it may enable pension wealth to be immediately exempt from IHT (after income tax on the withdrawal) without the need for the donor to survive seven years. However, the exemption remains highly fact-sensitive and is often mishandled in practice. Advisers should therefore ensure that any such arrangement is properly implemented and supported by appropriate evidence, including confirmation that:

• there is a settled pattern of gifting, or a clear intention to make gifts on a regular basis;
• the gifts are made out of income rather than capital; and
• the donor retains sufficient income to maintain their usual standard of living.

The evidential aspect is particularly important where withdrawals are being increased specifically to facilitate gifting. The planning may still be effective in those circumstances, but contemporaneous records, cashflow analysis and a clearly documented rationale will be essential if the position is subsequently reviewed.

Drawdown and reinvestment into relievable assets

As pensions lose much of their historic IHT shelter, advisers may increasingly consider whether withdrawn funds should be redirected into assets capable of attracting IHT relief – i.e. those qualifying for Business or Agricultural Property Relief.

This “drawdown and reinvest” approach involves accepting an upfront income tax cost on extraction in return for potentially improving the IHT position once the relevant qualifying conditions have been met. In some cases, that may compare favourably with retaining pension funds that could otherwise fall within the IHT charge on death.

However, this is not a purely tax-driven strategy. Relievable assets are often higher risk, less liquid, more concentrated and operationally more complex. They may also be unsuitable where the client’s primary objective remains retirement security.

Aligning remuneration and estate planning for business owners

The reforms also carry important implications for business owners, particularly those aged 55 or over who are already able to access their pension benefits. Historically, many have prioritised pension accumulation while meeting lifestyle needs through salary, bonus or dividends. From April 2027, that approach may warrant reconsideration.

For some business owners, drawing on pension benefits to fund personal expenditure, rather than extracting additional remuneration, may improve the overall tax outcome. Potential advantages include reducing the pension fund exposed to IHT, avoiding employee and employer National Insurance contributions on equivalent earnings, and enabling corporate funds to be invested in the business in a way that preserves IHT protection for the owner when the shares qualify for Business Property Relief.

This analysis must still take account of the wider corporate tax consequences, and the client’s retirement and succession plans. For this client group, remuneration planning and estate planning can no longer sensibly be viewed in isolation.

Revisiting Qualifying Recognised Overseas Pension Schemes (QROPS) for internationally mobile clients

For individuals who are, or expect to become, non long-term UK residents for IHT purposes, the location of the pension scheme remains an important factor in the IHT analysis.

Broadly, where the individual is non-long-term UK resident, the IHT charge is generally limited to relevant pension property held in UK established arrangements. By contrast, for long-term UK residents, relevant pension property may fall within the IHT regime regardless of where the pension arrangement is established, subject to the detailed statutory rules.

Against that background, internationally mobile clients may wish to consider whether a transfer to a QROPS could form part of longer term planning. However, this is a specialist area and should not be treated as a routine solution. A transfer to a QROPS may trigger an overseas transfer charge unless a statutory exclusion applies, and advisers must also consider the tax treatment of benefits and investments in the scheme jurisdiction, the local pension regulatory framework, and the succession rules governing death benefits and beneficiary entitlements.

For some clients, an overseas transfer may support broader estate and retirement planning objectives. For others, it may add complexity, cost and implementation risk without delivering a proportionate benefit.

Spousal by-pass trusts

A spousal bypass trust can also be an effective way to manage pension wealth for IHT purposes. In practice, it is a structure that allows pension death benefits to be paid into a discretionary trust rather than directly to a surviving spouse, preserving control and keeping the funds outside their estate.

In some cases, it may be preferable to accept the immediate IHT charge when transferring pension funds into a relevant property trust, particularly if the fund is expected to grow significantly. By moving the pension at today’s lower value, future growth occurs outside the estate, reducing long‑term exposure to IHT. Although the trust will be subject to periodic and exit charges, these are typically modest compared with the potential tax saved. This approach can therefore offer a controlled, long‑term structure for passing pension wealth to the next generation while limiting future IHT liabilities.

Life assurance as an IHT planning tool

Life assurance can provide valuable liquidity to meet future IHT liabilities and is likely to become increasingly important after 2027. When a policy is written in trust, the proceeds usually fall outside the estate. However, premium payments are treated as gifts and amounts exceeding exemptions may create Chargeable Lifetime Transfers and immediate charges to IHT.

The re-emergence of annuities

There are several types of annuities that can be taken, but broadly, purchasing a lifetime annuity can immediately eliminate an individual’s future IHT exposure on their pension, converting their pension fund into a guaranteed income for life. In addition to providing the regular income, an annuity can also support structured gifting (including those that could qualify for the gifts out of surplus income exemption).

However, purchasing an annuity is a permanent and irreversible decision. Clients lose their investment control and ability to adapt their pension strategy, if circumstances change. Furthermore, annuity income is taxable and, if it is not needed and simply accumulates, it increases the taxable estate.

Although recent reports suggest that annuities are becoming increasingly popular in response to the reforms, it is essential that clients are fully advised on the available annuity options and their respective advantages and disadvantages.

A new era for pension planning

In practice, the most effective planning is likely to involve a combination of measures, tailored to the client’s wider circumstances, rather than reliance on any single strategy.

Advisers should also not overlook the practical importance of co-ordinating multiple pension arrangements. While consolidation or aggregation is not necessarily an IHT planning tool in itself, it can play an important role in identifying likely liquidity needs, understanding how any IHT liability may be funded, and helping to achieve smoother estate administration on death.

For many clients, the central planning question will no longer be whether pension funds should be preserved at all costs, but how they can best be deployed alongside other assets to support both lifetime objectives and efficient succession. Please reach out to Jon Croxford if you would like to discuss further.

Disclaimer

This article is for general information purposes and should not be relied upon as legal, tax or financial advice.

References to potential planning opportunities are illustrative only and do not represent recommendations. The effectiveness and suitability of any strategy will depend on individual circumstances, and readers should seek professional advice before taking any action in relation to their pension arrangements, estate planning or tax affairs.