For years, leaving your pension to your children was one of the most tax-efficient things you could do. Your pension sat outside your estate, so it passed to them free of inheritance tax — no matter how large it was. Many people deliberately left their pension untouched for exactly this reason.
From 6 April 2027, that changes. Your unused pension becomes part of your estate, and if your estate is large enough, your children could lose 40% of it to inheritance tax — and in some cases considerably more. Here’s what your children will actually inherit under the new rules, and what you can do about it.
Your pension passes to your children outside your estate – free of inheritance tax, whatever its size.
Your pension joins your estate. Above the threshold, your children lose 40% to inheritance tax – and more if you die after 75.
The old deal — and why it was so good
Until 5 April 2027, when you die your pension scheme can pay your remaining pot to whoever you’ve named, free of inheritance tax. If you died before age 75, your children could even draw on it without paying income tax. After 75, they’d pay income tax on withdrawals, but still no inheritance tax.
This is why pensions were such a powerful way to pass on wealth. The advice many people received — spend your other savings, leave the pension for the kids — made complete sense under these rules.
What changes for your children in 2027
From 6 April 2027, your pension is added to the rest of your estate before inheritance tax is worked out. If your total estate — pension, property, savings, everything — exceeds your threshold, your children pay 40% on the excess.
And if you die after age 75, there’s a second layer: your children also pay income tax when they withdraw from the inherited pension. Those two taxes stack.
Your children receive just £108,000 of your £300,000 pension – an effective combined tax rate of 64%.
So can you still leave your pension to your children tax-free?
The honest answer: sometimes yes, often only partly. It depends on the same factors that determine any inheritance tax bill.
Your children may still inherit your pension tax-free if your whole estate stays below your nil-rate band threshold (£325,000, or £500,000 if you’re leaving your home to them, and double those for married couples). If your estate is comfortably under the threshold even with the pension included, the 2027 change may not cost your children anything.
But if your estate is above the threshold, some inheritance tax will be due — and the question becomes how to reduce it, not avoid it entirely.
Five ways to protect what your children inherit
There are several legitimate, well-established strategies. The right one — or combination — depends on your circumstances, and these should be modelled by a regulated adviser before you act. But in plain English:
- Draw down and gift. Take money from your pension, and gift it to your children. Gifts fall outside your estate after seven years. You pay income tax on the withdrawal, but potentially save a larger inheritance tax bill later.
- Use your gift exemptions. £3,000 a year can be gifted free of inheritance tax immediately, and regular gifts from surplus income can be exempt regardless of size.
- Life insurance in trust. A whole-of-life policy written in trust pays out free of inheritance tax on your death — your children use it to pay the bill, keeping the rest of your estate intact.
- Keep your expression of wishes up to date. This doesn’t reduce the tax, but it ensures your pension actually reaches your children rather than being misdirected. It’s free and takes 30 minutes — everyone should do it.
- Specialist advice on your whole estate. The interaction between your pension, property, and other assets is where the real planning happens, and it’s genuinely worth professional modelling.
Make sure it actually reaches your children
Whatever else you decide, check your expression of wishes is up to date. This form tells your pension provider you want your children to receive your pot. Without a current one, the trustees decide – and your pension could go to the wrong person, or into your estate. It’s free, takes 30 minutes, and is the first thing everyone should do.