Less than a year away. Here's what the change does, what the November 2025 Budget refined, and how it shifts estate planning for anyone with a meaningful DC pension pot.
4 min read - Part of News & Updates at FreeBefore365
This is the most significant change to UK retirement and estate planning since the 2015 pension freedoms, and it lands on 6 April 2027. With less than a year to go, it's worth a clear summary of what's actually changing, what was refined in the November 2025 Budget, and what to consider doing about it.
What's changing
From 6 April 2027, most unused defined contribution (DC) pension pots and pension death benefits will be brought into the estate for inheritance tax purposes. Until then, DC pensions sit entirely outside the estate, which is what made them such a powerful estate planning tool for the last decade. After that date, pension wealth counts toward the IHT calculation in the same way as ISAs, savings, property and other assets.
The standard IHT rate of 40% applies to estates above the threshold. For a single person the threshold is £325,000, rising to £500,000 if the main home passes to direct descendants. For a married couple the combined threshold can reach £1m where everything passes to the surviving spouse on first death and the home passes to direct descendants on second death.
Pensions left to a spouse or civil partner remain exempt at first death under the spousal exemption. The change bites on second death.
What the November 2025 Budget refined
The original 2024 announcement created practical concerns about how executors would actually pay IHT on pension assets they couldn't access. The November 2025 Budget added two helpful refinements.
Personal representatives can now instruct pension scheme administrators to pay IHT directly to HMRC from the pension funds before any release to beneficiaries. And executors can issue a "withholding notice" requiring the scheme to hold back up to 50% of pension funds for up to 15 months from the date of death, giving time to sort the IHT position properly.
These aren't reductions in the underlying IHT exposure. They're administrative changes that reduce the burden on executors. Worth knowing about if you've been appointed as one.
Who it actually affects
The Office for Budget Responsibility estimates around 10,500 estates will become newly liable for IHT in 2027-28 because of this change. [OBR] That's the additional bill on top of estates already paying.
For readers of this site specifically, the typical exposure looks like this. Mortgage-free home, ISA savings built up over a working life, accumulated pension pot, possibly some inheritance from parents. Before April 2027 the pension sat outside the calculation, often keeping the overall position comfortably under the threshold. After April 2027, adding the pension to the picture can push the same household significantly above £1m.
The FreeBefore65 take:
For families approaching early retirement with the goal of leaving meaningful inheritance to children, this change inverts the conventional wisdom of "leave the pension untouched, spend other assets first." That strategy was built on the pension being IHT-efficient. Now it isn't.
The strategic shift, broadly, is toward drawing pension during lifetime where possible, particularly during the bridge years before other income kicks in, and either spending it, gifting it (starting the seven-year clock), or moving it into ISA wrappers. Done well, this can substantially reduce the eventual IHT bill on the second-death consolidated estate.
The specifics need regulated advice. The window matters: anyone with a substantial DC pension pot and a likely IHT liability should be in front of an IFA before April 2027, not after.
Further changes in 2027
Further reading:
- UK Wills, Lasting Power of Attorney and Estate Planning - What Every Early Retiree Needs to Sort Before It's Too Late
- The £1 Million Inheritance Tax Allowance for Couples: What Spousal Exemption Does and Doesn't Solve
- Do I Need a Financial Adviser Before Retiring? The Honest Answer From Someone Who Didn't
Part of News & Updates at FreeBefore65.
Tony writes about his personal journey to early retirement at freebefore65.co.uk. He is not a financial adviser. All content reflects his own experience and research and should be taken as a starting point for your own thinking, not as professional advice.
Add comment
Comments