From April 2027, unused pension funds will, for the first time, fall within the scope of UK inheritance tax (IHT). For many clients, this could mean an unexpected rise in their taxable estate and a smaller inheritance for their beneficiaries.
Pensions Are No Longer Untouchable
Since pension freedoms were introduced in 2015, many HNW clients have treated pensions less as a retirement income source and more as an inheritance tool.
The Institute for Fiscal Studies (IFS) found in 2023/24 that:
- 26% of high-value defined contribution pension holders withdrew less than 2% a year
- 30% withdrew just 2–4% a year
In other words, pensions were being preserved to transfer wealth tax-free. By bringing them into the IHT net (both UK pensions and QNUPS), the government’s message is clear: pensions can no longer be left untouched. They must now sit at the heart of IHT planning.
What Can Be Done?
The new rules don’t mean raiding pensions recklessly. They remain tax-efficient during a client’s lifetime and vital for retirement income. But in the right circumstances, strategic withdrawals from pensions can reduce IHT exposure and strengthen family wealth planning.
1. Life Cover in Trust
Flexi-access drawdown can fund a whole of life policy in trust to meet IHT liabilities. If premiums qualify under the “normal expenditure out of income” exemption, they are immediately IHT-free.
2. Gifting In Retirement
Regular withdrawals from flexi-access drawdown can be gifted to beneficiaries. Where the same exemption applies, the IHT benefit is immediate. Advisers can also explore using the withdrawals to fund pensions for children or grandchildren, allowing them to secure income tax reliefs.
3. International Insurance Solutions for Lump Sums
Large one-off withdrawals, such as the pension commencement lump sum, are well suited to international insurance bonds in trust. This option removes value from the estate, grows tax-deferred, and allows efficient withdrawals within the 5% allowance. Segments can even be assigned to non-taxpayers to make full use of allowances.
4. For Non-Long-Term Residents
Non-long term UK residents are only liable to UK IHT on UK assets. UK pensions fall into IHT, but QNUPS do not. In practice, a non-LTR living in a tax-friendly jurisdiction such as the UAE may benefit from accessing their UK pension in full and placing the proceeds into an international insurance-based wealth solution, keeping wealth offshore and outside the IHT net.
Building Collaborative Advice
Clients will need more than financial planning alone. Advisers who work closely with solicitors and accountants will be best placed to deliver joined-up solutions.
- Solicitors: With personal representatives now responsible for calculating and reporting pension IHT, solicitors may need IFAs to value pensions or guide beneficiaries. They will also lead on updating wills and trusts, which should align with financial strategies.
- Accountants: IFAs can model the impact of drawdown and gifting, while accountants validate tax efficiency. Together, they can design remuneration, pension funding, and succession strategies that minimise IHT exposure.
By becoming the adviser who connects financial, legal, and tax advice, you make yourself indispensable – and open the door to referrals and new client relationships.
Act Now
While pensions entering the IHT net may look like a setback, they are really a disruptor. Traditional planning tools such as trusts, life cover, and particularly international insurance-based solutions remain powerful ways to manage exposure.
For advisers, this is the moment to lead the conversation. Show clients how to rethink pensions strategically, reposition tax-free cash, and keep wealth working for their families
Don’t wait until 2027. Act now and keep your clients one step ahead.