Scott Kingsley, Senior Wealth Advisor
For years, pensions have been the quiet hero of estate planning: tax-friendly, reliable, and mostly out of the inheritance tax firing line. But from April 2027, that peace of mind takes a knock. Unused pension savings will fall within the UK’s inheritance tax net, and due to the way the tax layers stack, your loved ones could see as much as 67% of your pension evaporate in tax.
Harsh? Absolutely. But with a bit of planning, you can take control. For expats and internationally mobile families, a few smart moves now could make all the difference between a thoughtful legacy and an accidental tax bill.
Right now, if you pass away before age 75, any unused pension funds can typically be passed on tax-free. After 75, your beneficiaries pay income tax on withdrawals at their marginal rate, but those funds are still outside the scope of inheritance tax.
That changes in April 2027, when unused defined contribution pensions (like SIPPs) will be brought into the inheritance tax net. This scope and timing were confirmed in the Autumn Budget 2024 technical paper, giving savers just under two years to review and adjust their estate planning strategies. In practice, that means a potential 40% IHT bill before your heirs even touch the funds, followed by income tax when they do.
Importantly, following a government U-turn in July 2025, the responsibility for reporting and paying any inheritance tax on unused pension funds will sit with the personal representatives of the estate, not with the pension scheme administrators, as originally proposed. This adds an administrative burden for executors, particularly where pension values are high or split across multiple providers.
This shift matters because pensions have long been a back-pocket strategy for wealth transfer. Now, they're on HMRC's radar, and that means assumptions made even five years ago need to be dusted off and reviewed.
Another key change worth factoring in is the abolition of the Lifetime Allowance (LTA) from April 2024. While this removes the previous ceiling on tax-efficient pension savings, it doesn't mean pensions are entirely uncapped. A new cap applies to tax-free lump sums and death benefits, known as the Lump Sum and Death Benefit Allowance (LSDBA), currently set at £1.073 million. Anything above that may be taxed as income when drawn, depending on the recipient’s circumstances. So while the LTA has gone, limits still apply when passing on larger pension pots.
Let’s say you’ve built up UK pension assets over decades, but you now live abroad, or your children do. That cross-border element introduces a layer of complexity that the 2027 rule change only intensifies.
Many expats have relied on the principle of spending other assets first, ISAs, general savings, and letting their pensions grow in peace, knowing they could pass them on cleanly. That tactic may no longer hold.
If your heirs aren’t UK tax residents, they might still find themselves facing UK IHT on the inherited pension, income tax in their own country when they access the funds, or both. Add in exchange rate fluctuations, local reporting rules, and differing definitions of what constitutes a pension or taxable estate, and suddenly a generous legacy can become a frustrating legal marathon.
In short, what was once a tax-savvy plan could become a surprisingly expensive gift. And worse, it may create stress and delays for the very people you hoped to support.
This figure isn’t theoretical. Let’s break it down with a real-world scenario.
Say you leave a £100,000 pension untouched when you pass away. Your estate has already used up its inheritance tax allowances.
What’s left? £33,000. In effect, two-thirds gone. That’s the 67% tax trap.
Even for a basic-rate taxpayer, the combined hit is still over 50%. And none of this takes into account admin fees, currency costs, delays in accessing the funds, or the risk that your pension provider moves slowly or makes the process difficult.
The broader point is this: what your pension is worth on paper may not reflect what your family actually receives.
The 2027 change was announced in the Autumn Budget of 2024. The idea was to bring pensions in line with other estate assets. From a policy perspective, it’s about fairness. From a planning perspective, it’s about disruption.
This is a big deal because it challenges the idea that pensions are the most efficient vehicle to leave behind. For people approaching 75, or anyone with substantial unspent pension savings, this is a wake-up call. If you’re lucky enough to not need your pension in retirement, that used to be a tax planning win. Now, it could create an unintended tax time bomb.
If your estate is hovering near £2 million, the pain may be doubled. Once you cross that line, you begin to lose the residence nil-rate band, a valuable IHT buffer worth £175,000. You can calculate this using the HMRC Inheritance Tax Manual. With pension assets now counting towards your estate, you could lose that benefit inadvertently. It’s not hard to imagine how a modest pension pot could push an otherwise tax-efficient estate into unnecessary exposure.
This isn’t about panic. It’s about knowing the rules ahead of time and playing the hand well. And, ideally, getting advice from someone who’s seen how this plays out in practice.
The good news is you still have time, and options. If you act before 2027, you can sidestep some of the harsher outcomes. Here are five approaches that might make sense:
If you’re retired and your pension is likely to outlast you, it could be worth taking slightly higher withdrawals now. You might spend some, or gift it. Either way, reducing the pot before death could reduce the IHT burden. Just be mindful of your own income tax position and allowances. And don’t forget to check how withdrawals affect any benefits, tax credits, or residency rules if you're living abroad.
Every UK resident can give away £3,000 a year IHT-free. Larger gifts may become exempt after seven years. You can also give regularly out of surplus income, a surprisingly underused rule that could suit those with healthy pensions and modest living expenses. This might mean setting up standing orders to grandchildren, or paying school fees directly. It doesn't have to be complicated, just consistent and well-documented.
For years, the advice was: use ISAs first, pensions later. But if pensions are now less tax-friendly on death, that may flip. ISAs are still subject to IHT, but your heirs won’t pay income tax when they access the funds. Timing matters, especially if your heirs are higher-rate taxpayers. A quick cash flow model or projection can often reveal which sequence gives you (and them) the best after-tax outcome.
Offshore bonds, family investment companies, or even simple diversified accounts in your country of residence might offer better estate control. These aren't for everyone, and they do carry risks, but a good adviser can help match structure to strategy. Sometimes, just simplifying what you hold and where you hold it can reduce future admin for your family.
Some international schemes, like QROPS, may offer different treatment depending on where you live. That said, UK transfer rules have tightened and there can be hefty tax charges. It’s not a silver bullet, but it’s worth reviewing with someone who understands the nuances. It may be that your pension is better off where it is, or that partial transfers are worth considering.
Here’s where it gets tricky. Many expats assume their residency shields them from UK IHT. It doesn’t. If your pension is UK-registered, and your estate is over the IHT threshold, the UK still wants its share.
Others believe that a will or a local succession plan will override UK pension rules. Again, not so. Pensions are often governed by their own trust documents and scheme rules, not your will.
A frequent oversight is the expression of wish form. It’s easy to forget, but vital. If it's out of date or missing key details, the pension scheme trustees may use their discretion, and not always in the way you'd hope.
And let’s not forget the risk of double taxation. Your heir could face UK IHT, then income tax in their home country. Add legal delays, cross-border paperwork, and FX exposure, and you have a potentially messy process.
Even well-intentioned plans can unravel under the weight of bureaucracy, especially when there’s grief involved. Getting ahead of it can make all the difference.
Pensions are still powerful tools. But the shift coming in 2027 makes them more complicated, and frankly, more dangerous to ignore. Timing, structure, and even the sequence in which you spend your money can affect what your family receives.
That’s why this isn’t just about products, it’s about strategy. The kind that balances what you need to live well now with what you want to pass on later.
If you're unsure where to start, have a chat with someone who understands the quirks of both UK tax and international lifestyles. The earlier you plan, the more flexibility you have. And if we’ve learned anything from recent rule changes, it’s this: the rules don’t wait for you to catch up.So don’t leave it to chance. A few well-timed decisions can help you keep more of your pension in the family, where it belongs. And if that sounds like a conversation worth having, I’m always happy to help get it started.