New inheritance tax rules will drastically alter how people use their pensions, and put a lot of individuals in difficult positions, writes Steve Gauke

For years, pensions have been one of the most effective ways for families to pass wealth to the next generation. But from April 2027, that will change, with most unused pension funds being brought into the scope of inheritance tax.

The problem isn’t simply that more families will face an inheritance tax bill. It’s that many may not realise they’re affected until it’s too late to prepare. We risk sleepwalking into a situation where thousands of families face unexpected tax liabilities at an already difficult time. Many families have planned around the old legislation, leaving a potential knowledge gap between the government distributing the new rules and the families who must understand them.

The scale of the change is significant; the government’s estimates suggest that around 10,500 estates will pay inheritance tax for the first time in 2027 to 2028, and that a further 38,500 will pay more, with the average bill expected to rise by around £34,000. These are, of course, only estimates, but the changes will drastically alter how people use their pensions in response. This shift will put a lot of individuals in difficult positions, after all, behind every one of those figures is a family who will be asked to find a large sum of money at a very difficult time. When you consider the cost of living crisis, and how many families are asset rich but cash poor, changes like these will have a huge impact on people’s lives.

The pension changes coming into effect in April 2027 may increase the inheritance tax payable by affected estates, potentially leaving beneficiaries with a larger tax bill and a smaller inheritance than anticipated. This adds to existing cash-flow pressures: beneficiaries can wait six to 12 months for their inheritance, while inheritance tax is generally due by the end of the sixth month after death. The changes won’t necessarily lengthen that wait, but executors usually need to pay the tax, or the first instalment where instalments are permitted, before obtaining probate. Under the new rules, beneficiaries may only be able to access around half of the affected pension benefits for up to 15 months. 

This is the core of the problem. On paper families are inheriting a significant amount of wealth. But in practice, they have very little cash available to pay the bills in front of them. The good news is that families still have time to prepare. The first step is to have open conversations about inheritance; however uncomfortable they may feel. Understand what an estate is likely to include, locate important documents and establish whether the upcoming changes could create an inheritance tax liability.

It’s also important to consider how any tax bill would actually be paid. Seeking independent financial advice, understanding the available payment arrangements and exploring options for accessing funds where necessary can help prevent difficult decisions being made under pressure. For example, a probate or inheritance loan, gives families early access to part of their inheritance, so that nobody is forced into a hurried sale.

Families will plan around whatever the rules are, but what they need now from the government is clarity, enough time to prepare and some flexibility when the system moves more slowly than the bills arrive. Inheritance should not become an unnecessary financial burden simply because families were unaware of the rules or unable to access their money when they needed it most.

Steve Gauke is managing director at Provira