Pensions and Inheritance Tax 2027: What the Changes Mean for FIRE
For a decade, pensions have been the most tax-efficient way to pass wealth to the next generation. From April 2027, that advantage largely disappears. Here is what the change means for UK FIRE investors — and what, if anything, you should do about it.
Published: 3 July 2026 at 09:00 · 8 min read
What Is Changing in April 2027?
Under rules announced in the Autumn Budget 2024, the government intends to bring unused pension funds and certain pension death benefits into the deceased's estate for inheritance tax (IHT) purposes from April 2027.
Until now, most pension funds have sat outside the estate entirely. You could die with £500,000 in a SIPP, and that £500,000 would not attract a single penny of IHT — it would pass to your nominated beneficiaries free of inheritance tax (though they might pay income tax on withdrawals, depending on whether you died before or after 75). This made pensions the go-to vehicle for passing wealth between generations in an IHT-efficient way.
From April 2027, under the proposed rules:
- Unused pension funds at death will be added to the deceased's estate value
- If the total estate (including the pension) exceeds the IHT threshold, 40% IHT will apply to the excess
- The pension scheme administrator — not the executor — will be responsible for calculating and paying the IHT on the pension portion
- This applies to defined contribution (DC) pensions including SIPPs, not to defined benefit pension income already in payment
The legislation is still being finalised as of mid-2026, with consultation ongoing. Check Gov.uk for the latest status. The April 2027 date is the stated target but may shift.
Who Does This Actually Affect?
The change only bites if your total estate — property, ISAs, savings, investments, and now pension funds — exceeds the IHT nil-rate band thresholds. Before any IHT is due, you have:
| Allowance | Amount | Conditions |
|---|---|---|
| Standard nil-rate band | £325,000 | Everyone |
| Residence nil-rate band | Up to £175,000 | Leaving main home to direct descendants; tapers away above £2m estate |
| Combined (single person) | Up to £500,000 | Requires home left to children/grandchildren |
| Combined (married couple / civil partners) | Up to £1,000,000 | Unused allowances transfer on first death; both nil-rate bands available on second death |
For a married couple who both own a home and plan to leave it to children, the combined estate can reach £1,000,000 before any IHT applies. If their combined estate (property + ISAs + savings + pension funds) is below that, the 2027 change has zero practical effect.
For single people, or those with larger estates, the threshold is lower and the change matters more. A single person with a £300,000 property, £150,000 ISA, and a £200,000 SIPP has a £650,000 estate — well above the £500,000 threshold. Before April 2027, only £450,000 of that estate (property + ISA) was inside the IHT net. After April 2027, all £650,000 would be included.
How Pensions and ISAs Compare After April 2027
Today, the two main investment wrappers sit in very different places for IHT. After April 2027, the gap narrows significantly:
| Feature | ISA (now and after 2027) | SIPP/DC pension (now) | SIPP/DC pension (after April 2027) |
|---|---|---|---|
| Growth inside wrapper | Tax-free | Tax-free | Tax-free |
| Withdrawals | Tax-free | Taxed as income (25% free) | Taxed as income (25% free) |
| Included in estate for IHT? | Yes — always has been | No — outside estate | Yes — pension funds included |
| Death before 75 | Taxable estate (40% IHT above threshold) | Tax-free to beneficiaries (outside estate) | Subject to IHT on estate; income tax still applies on withdrawals by beneficiaries |
| Death after 75 | Taxable estate (40% IHT above threshold) | Beneficiary pays income tax at marginal rate on withdrawals | Subject to IHT on estate; income tax still applies on withdrawals by beneficiaries |
| Access age | Any age | 57 (from April 2028) | 57 (from April 2028) |
The pension's IHT advantage — its defining feature for inheritance planning since 2015 — disappears almost entirely. After April 2027, pensions and ISAs are both inside the estate for IHT. The remaining differences are the income tax treatment on withdrawal and the pension access age.
This matters because under the proposed rules, beneficiaries could face a double tax hit on inherited pension funds: IHT at 40% on the estate, and then income tax at their marginal rate (potentially 40% or 45%) when they draw income from the inherited pension. HMRC has proposed that IHT paid should be deducted from the fund before calculating income tax, to avoid full double taxation — but the detail of how this works in practice is still being consulted on.
Does This Change the “Spend ISA First” FIRE Strategy?
The conventional FIRE drawdown wisdom has been: spend ISA first, let pension grow. The reasoning was threefold — ISAs have no access age restriction (useful before 57), ISA withdrawals are tax-free (unlike pension income), and leaving the pension untouched preserves its IHT-exempt status for heirs.
The 2027 change removes the third reason. Does that make "spend ISA first" wrong?
Not necessarily — but it becomes a more nuanced question. Here is how to think through it:
| Your situation | Drawdown strategy consideration |
|---|---|
| Estate unlikely to exceed IHT thresholds | 2027 change is irrelevant. Continue spending ISA first to preserve pension tax relief and defer income tax. |
| Large estate, inheritance is a priority goal | Consider drawing from pension earlier (while in a low income tax band) to reduce the pension fund before it attracts IHT at death. Both ISA and pension will be in the estate, so other IHT planning tools (trusts, gifting, life assurance in trust) become more relevant. |
| Retiring before 57 (pre-pension access) | ISA first remains correct for access reasons — you cannot touch the pension anyway until 57. The 2027 change does not alter this. |
| Income tax efficiency in retirement is priority | The pension still offers tax-relief on contributions and deferred income tax — advantages that may outweigh the IHT cost for those spending down their wealth in their own lifetime. |
For most FIRE investors, particularly those who plan to spend down their wealth over a long retirement, the primary benefit of the pension — tax relief on contributions and tax-deferred growth — remains intact. The 2027 change primarily affects people who were using the pension as an inheritance vehicle, not as a retirement vehicle.
Put simply: if you planned to spend your pension in your own retirement, very little changes. If you planned to pass most of it on, the planning landscape has shifted materially.
What Can You Do Before April 2027?
If you have a large pension fund and inheritance is a significant goal, there are steps worth exploring with a qualified financial adviser before April 2027:
- Crystallise pension funds while income tax rates are low. If you are currently a basic-rate taxpayer (or even below the Personal Allowance), drawing pension income now and reinvesting into an ISA can move funds from a potentially IHT-liable pension into a still-IHT-liable but accessible ISA — without changing the IHT outcome but reducing the pension balance subject to any double-tax complication.
- Consider gifting from other assets. IHT-exempt gifts (up to £3,000/year gift allowance, plus larger potentially exempt transfers that become exempt after 7 years) from ISA or cash savings can reduce estate values without touching the pension structure at all.
- Review life assurance in trust. A whole-of-life policy written in trust can provide a lump sum to pay an IHT bill without being included in the estate itself — a common strategy for larger estates that remains relevant after 2027.
- Update your Expression of Wishes. With pensions now entering the IHT net, beneficiary nominations and trust structures around pension death benefits may need reviewing.
- Wait for the final legislation. Several details are still being consulted on — including how IHT interacts with income tax on inherited pension funds. Avoid large irreversible decisions before the rules are confirmed.
Frequently Asked Questions
When will pensions become subject to inheritance tax in the UK?
The government announced in the Autumn Budget 2024 that unused pension funds will be brought into the estate for inheritance tax from April 2027. The legislation is still being finalised and the date may shift. Under the proposed rules, the pension administrator (not the estate) will be responsible for calculating and paying any IHT due on the pension portion of the estate.
Does the 2027 pension IHT change affect everyone?
No — it only affects people whose total estate (including the pension fund) exceeds the IHT nil-rate band thresholds. The standard nil-rate band is £325,000, with an additional residence nil-rate band of up to £175,000 for those passing on a family home to direct descendants. Couples can combine these allowances. Many estates will still be below the threshold even with pensions included.
Should I change my drawdown strategy because of the 2027 pension IHT change?
Possibly — but only if inheritance is a significant goal and your estate is likely to exceed the IHT thresholds. For FIRE investors primarily focused on funding their own retirement, the case for drawing from pension first (rather than ISA first) becomes stronger once pensions are inside the IHT net. However, the income tax saved by delaying pension withdrawals may still outweigh the IHT saving in many cases. This is a planning question that warrants regulated financial advice for larger estates.
Will the pension IHT change affect the tax-free 25% lump sum?
The proposed changes relate to inheritance tax on unused pension funds when you die — not to the 25% Pension Commencement Lump Sum (PCLS) you take during your lifetime. Your ability to take up to 25% of your pension tax-free (up to the Lump Sum Allowance of £268,275) is unaffected by the 2027 IHT change.
Are ISAs also subject to inheritance tax?
Yes — ISAs have always been part of your estate for IHT purposes. There is no IHT exemption for ISA funds. When you die, your ISA funds are counted toward your estate value and may be subject to 40% IHT above the nil-rate band threshold. Spouses and civil partners can inherit ISAs using the Additional Permitted Subscription (APS) allowance, preserving the tax-free wrapper. From April 2027, pensions will join ISAs as assets inside the estate.
Work Out Your Own Numbers
Model how your pension balance changes over time and what remains at different ages:
- Pension Drawdown Calculator — see your projected pension balance at each age, factoring in withdrawals and investment growth
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