Preparing for the IHT changes on pensions: what advisers should be doing now

With just over a year remaining until unused pension funds are brought into the scope of inheritance tax (IHT) from 6 April 2027, advisers and clients face a significant shift in how pensions can and should be used within estate planning. The upcoming reform reverses a decade of favourable treatment, where unused pension pots in discretionary schemes were typically excluded from a deceased individual’s estate.

The finance bill containing the legislative changes to pension and IHT has now received Royal Assent, meaning it has completed all stages of approval in the UK Parliament and has been formally enacted into law.

Advisers must therefore begin taking proactive steps to protect clients from unforeseen tax liabilities and help them transition into the new regime. This article outlines the key priorities for advisers during the next 12 months.

Reassessing nominations and death benefit structures

One of the most immediate tasks is to revisit and review client pension nominations and associated death benefit arrangements. Many pension schemes operate under discretionary trust structures, meaning that trustees have the authority to determine beneficiaries, which keeps benefits outside the taxable estate. This favourable treatment, central to many wealth‑transfer strategies, will no longer apply for most pensions from April 2027.

Under the new rules, directing death benefits to a surviving spouse or civil partner, who remains fully exempt from IHT, will in most cases become the most tax‑efficient default strategy. Structuring benefits this way ensures that pension assets can pass without triggering an immediate IHT charge, preserving flexibility for future planning and giving the surviving spouse full control over how and when those funds are drawn.

For deaths occurring before April 2027, advisers have a brief opportunity to help clients secure meaningful long‑term IHT savings. Since unused pension funds currently fall outside the taxable estate, directing benefits to children or other non‑spouse beneficiaries can allow wealth to pass fully IHT‑free. This advantage will soon disappear, so revisiting beneficiary nominations now is essential to avoid losing a relief that won’t be available after the rule change.

Advisers should therefore undertake a review of each client’s nominations to ensure beneficiaries and distribution structures remain appropriate within the new rules. While most unused pension funds will now fall into the estate, it is worth noting that death‑in‑service benefits payable from registered pension schemes will remain out of scope, a clarification confirmed following HMRC’s technical consultation.

Redesigning retirement income strategies

The idea that pensions are best left untouched for as long as possible is now shifting. Since unused pension funds will soon be taxable upon death, clients may benefit from drawing income from these pots earlier while preserving non‑pension assets for inheritance purposes. This reverse strategy may feel counterintuitive to clients who have spent years being guided to the contrary, so advisers will need to invest time in clear explanation and scenario planning.

Evaluating cashflow projections will help determine whether early pension withdrawals, gifting strategies, or reallocations between pensions and non‑pension assets can minimise future IHT liabilities. The Government has explicitly stated that these reforms aim to ensure pensions are used “for their intended purpose of providing retirement income”, making it necessary to realign client strategies accordingly.

Considering alternative IHT‑efficient wealth transfer strategies

Because pensions will no longer offer the same IHT shelter for most clients after April 2027, advisers will need to refocus on a wider set of estate‑planning strategies to ensure clients can continue to pass on wealth tax‑efficiently. This shift creates an opportunity to revisit established planning tools that may become more relevant in the new environment.

One area likely to see renewed importance is the strategic use of gifting. While clients may previously have prioritised preserving pension funds for inheritance, advisers can now encourage a greater focus on lifetime gifting, taking advantage of annual exemptions, the normal expenditure‑out‑of‑income rule, and the seven‑year PET (Potentially Exempt Transfer) framework. By gifting surplus capital sooner, clients can reduce the size of their taxable estate in ways that pensions previously facilitated. For clients with strong cashflow and secure retirement income, gifting may become one of the most powerful tools to mitigate future IHT exposure.

Advisers should review the potential role of trusts, particularly where clients wish to retain control over how assets are managed or accessed by beneficiaries. Trusts can help remove value from the estate while offering structure and oversight, although their tax treatment needs to be weighed carefully. Options such as the use of business‑relief qualifying investments, life assurance for IHT, and family investment companies may also now warrant greater attention.

With the legislation now enacted, advisers have a limited window to reassess client nominations, revisit retirement income strategies, and reconsider how pensions interact with broader estate-planning tools. By proactively reviewing structures, modelling the tax impact of withdrawal patterns, and exploring complementary planning options such as gifting and trusts, advisers can help clients adapt smoothly to the new regime. Acting sooner rather than later will be key to protect clients from avoidable tax exposure and to ensure their long-term wealth transfer objectives remain on track.