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Adriana Lowe
Senior Private Client Manager
There is a major change coming in April 2027 to the tax treatment of your undrawn pension savings on death.
If your estate is likely to be subject to UK Inheritance Tax (IHT), this change may well mean that you want to rethink your estate planning.
Currently, undrawn pension savings are ignored when it comes to calculating the value of an estate and how much IHT is due on it. Beneficiaries of your pension will not pay IHT on the funds they receive, regardless of the value.
From 6 April 2027, this will no longer be the case. If the combined value of your estate and any remaining undrawn pension savings exceeds the nil rate band (currently £325,000), the excess will be subject to IHT.
Some bequests are IHT free from your main estate (for example, bequests to a surviving spouse or UK registered charity), but IHT will soon apply to estates that previously would not have met the minimum threshold, as the value of the associated undrawn pension savings will tip them over.
Depending on who your beneficiaries are, they may face a tax bill that you hadn’t accounted for in previous estate planning.
Mike Bonner-Davies, Senior Private Wealth Adviser & Pensions Specialist at PwC says:
"The impact of these rule changes, which will bring pensions into the scope of inheritance tax from April 2027, will be significant and widespread. This is something that individuals will need to consider carefully as part of their overall wealth strategy and succession planning.
There are options available. In advance of the start date of the new rules, we are already seeing pension scheme members being proactive and holistically reassessing their position. Using pensions to support charitable giving in lifetime and/or on death can be a beneficial option."
If you have a significant amount in one or more Defined Contribution pensions (such as Personal Pensions, SIPPs, SSASs, QNUPS or QROPS), it is very important to get tailored, specialist advice about how this will affect your circumstances.
If you have a pension that you are not drawing upon, or which will still be substantial on your death, you may want to consider a gift to charity in life or as a legacy. As well as being a wonderful way to support the causes you care about, this can have major tax efficiencies.
During your lifetime, you can make a tax-free charitable gift directly from your pension via payroll giving, if your pension provider has signed up to the scheme.
You may also have the option of withdrawing funds from your pension, paying and then reclaiming the tax paid through a combination of Gift Aid and your self-assessment.
On death, leaving 10% or more of your estate to charity, reduces the IHT rate from 40% to 36%, which can result in significant reductions in the IHT due. However, charitable payments from undrawn pension savings and those from your main estate may be treated differently for tax purposes. If you are considering leaving a charitable bequest, speak to a specialist tax adviser, who can recommend the most appropriate way to structure it for your circumstances.
If you decide to add or increase the amount you are leaving to charity, CAF can help. Our Charitable Legacy Service provides a simple, efficient way to support multiple beneficiaries.
The Charities Aid Foundation (CAF) exists to encourage and facilitate charitable giving and supports a system of simple tax incentives which makes it appealing for donors to give.
CAF has been a Payroll Giving Agency since the scheme launched in 1987, and we are calling on all pension providers to make payroll giving available to their clients so they can benefit from a simple, tax-free way to give to charities from their pension, during their lifetimes.
If you are setting up a new pension, or switching provider, and want to benefit from this option, make sure to check if payroll giving is on offer.
This article draws on expertise shared by Mike Bonner-Davies, Senior Private Wealth Adviser & Pensions Specialist, PwC.
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This year’s UK Giving Report brings together the latest research and insights on how people across the UK are giving today. While it highlights some real challenges, it also reveals the trends shaping public generosity.
Our research found that around two-thirds of all charitable giving is unplanned, prompted by conversations, appeals, or being moved by personal experience rather than by a pre-existing commitment. So, why not be the one to start that conversation?
Rather than spreading funding widely, many donors are focusing their philanthropy on particular places and communities they care about, supporting solutions that reflect local needs, strengths, and lived experience.