Pensions, Inheritance tax, and passing on wealth

This guide explains the April 2027 rule that brings pension pots into the remit of Inheritance Tax (IHT), exploring how this could affect your estate, and outlining practical options (such as Junior ISAs) that could help you to protect what you pass on to your family.

By Caragh Medlicott

New

Created on: 14/07/2026

Reading time: 8 mins

Introduction and key takeaways

From April 2027, unused pension pots will be treated as part of your estate for inheritance tax (IHT) purposes. This is a major shift that could affect many families and their plans when it comes to passing on wealth to children.

If you’re a parent or grandparent thinking about how to protect what you leave behind, it’s important to understand the change, how it might alter your estate’s IHT exposure, and practical alternatives that some families are using to move savings outside estates. One alternative is a Junior ISA (also known as JISA).

Here are the key takeaways, but keep reading for more detail:

From April 2027, pensions and inheritance tax rules change: unused pension funds will be added to estates for inheritance tax (IHT) calculations.
This change will, for some people, push otherwise-tax-free estates above IHT thresholds – the impact depends on your home value, size of your pension pot, and any allowances you have.
There are some options for potentially avoiding this, including pension drawdown, gifting (including into JISAs), and trusts – but each carries trade-offs in tax, control, and complexity.
For parents with under‑18s, Junior ISAs could be a useful vehicle for passing wealth to your children outside your estate over the long term.

Use the links below to jump ahead to relevant sections.

How inheritance tax on pensions currently works
What's changing in April 2027
How could this affect your estate?
What are your options now?
Junior ISA and inheritance tax planning
What if my child has a Child Trust Fund?
How Wealthify can help

How inheritance tax on pensions currently works

Historically, most pension pots were effectively deemed to be outside the estate for Inheritance Tax (IHT) purposes. Typically, this was even more likely when these were administered as death benefits paid directly from the pension scheme.

As of 6th April 2027, pension pots will no longer be treated as outside of your estate and become an inheritance tax liability.

Pensions have generally been considered an attractive estate-planning vehicle: pots can currently pass to beneficiaries without forming part of the estate value used for IHT, producing potentially significant tax advantages.

Why this mattered:

Pension funds could bypass probate in some situations
Death benefits could be paid flexibly to nominated beneficiaries
Families used pensions alongside other tools to reduce their IHT exposure

What's changing in April 2027

It was announced in the 2024 Autumn Budget that, from April 2027, unused pension funds will be included in the deceased’s estate when calculating IHT.

In practice, this means a pension pot left unspent at death may now push an estate’s value above IHT thresholds and become liable to tax at up to 40%.

Wealthify’s Chief Operating Officer, Simon Holland, said this about the change:

“For many people, pensions have long played a dual role: providing an income in retirement while also forming part of their wider estate planning. These changes are likely to prompt more families to review how they intend to pass on wealth and whether their existing plans still reflect their goals.

The best approach will, of course, depend on individual circumstances, so it’s important to understand the options available before making any decisions.”

Why the change?

The government cites ‘fairness’ and ‘simplification’ in the decision to change IHT treatment.^[1]

The new rules close the gap between pension wealth and other types of assets that have long been part of estates.

But how could this affect yours? To see the impact, you’ll need to consider existing IHT allowances and how the additional pension value is added to the estate. We explore this below.

How could this affect your estate?

To understand the impact of inheritance tax on pensions, it's important to understand the current inheritance tax thresholds.

The key figures are:

£325,000 standard nil-rate band
£175,000 residence nil-rate band (when passing a home to direct descendants)
£500,000 effective threshold for many individuals passing a home to children
£1 million combined threshold for many married couples and civil partners
40% inheritance tax rate on assets above available allowances

Worked example

Imagine a retired homeowner has:

A property worth £350,000
An unused pension pot worth £300,000

Please note, this example is only for illustrative purposes.

Before 6th April 2027

Only the property forms part of the estate for inheritance tax purposes.

Estate value: £350,000

Assuming the home passes to children, the estate falls within the available £500,000 threshold, meaning no inheritance tax is payable.

After April 2027

The pension pot is added to the estate.

Estate value:

Property: £350,000
Pension: £300,000
Total estate: £650,000

If the available threshold remains £500,000, the taxable amount becomes £150,000.

Inheritance tax liability:

£150,000 × 40% = £60,000

This example illustrates why many families are reviewing their estate plans ahead of the rule changes. Even estates that currently sit comfortably below inheritance tax thresholds could become taxable once pension wealth is included.

What are your options now?

The proposed changes mean that some people may wish to review how their pension fits into their wider estate planning.

There is no one-size-fits-all solution, and the most appropriate approach will depend on your personal circumstances, objectives, and tax position.

Wealthify does not provide financial advice, but getting advice from a financial adviser could help you understand the implications of any decisions.

Pension drawdown

Some people may consider taking benefits from their pension during their lifetime rather than leaving the full value invested.

Things to consider: Accessing pension funds could reduce the amount remaining in the pension upon death.

However, withdrawals are typically subject to income tax and may affect your overall tax position. Taking money from your pension could also reduce the income and flexibility available to you later in retirement.

Gifting (including using Junior ISAs)

Gift giving during your lifetime may be one way of leaving inheritance to your children. Depending on the type of gift and your circumstances, some of these may fall outside your estate for Inheritance Tax purposes.

Things to consider: Gifting can help move assets out of your estate, but you will usually give up ownership and control of those assets. Additionally, the tax treatment of gifts can be complex and will depend on factors such as the amount gifted and how long you live after making the gift.

Some people also choose to support children or grandchildren through savings and investment arrangements (such as Junior ISAs) as part of a broader family financial planning strategy.

Trusts

Trusts can be used to pass assets to future generations while allowing a degree of control over how and when those assets are distributed.

Things to consider: Trusts can play an important role in estate planning for some families, but they can also involve legal, tax, and administrative complexities. Establishing and maintaining a trust may incur costs, and the tax treatment will depend on the type of trust and your individual circumstances.

Other options (such as life cover, beneficiary nominations, and review of your estate plan)

These proposed changes could be a useful opportunity to review your wider estate planning arrangements.

This might include checking that pension beneficiary nominations remain up to date, reviewing your will to ensure it reflects your current wishes, and considering whether your existing plans are still aligned with your objectives.

Some individuals may also consider having life insurance written in trust, as this could help beneficiaries to meet a potential future IHT liability.

As with any protection arrangement, the suitability, costs, and benefits will depend on your individual circumstances.

Junior ISA and inheritance tax planning

As families consider the potential impact of future IHT changes, Junior ISAs are increasingly being discussed as part of broader intergenerational financial planning.

A JISA allows parents, grandparents and other family members to save or invest on behalf of a child under the age of 18. For the 2026/27 tax year, up to £9,000 can be contributed each year.

While a JISA is primarily a long-term savings and investment vehicle for children, it can also form part of a wider family wealth-transfer strategy.

Simon commented: “Changes to inheritance tax rules really highlight the importance of planning ahead with plenty of time. Junior ISAs might not be the right avenue for everyone, but they can provide a tax-efficient way to invest, gift and make an investment in a child’s future. Given the changing landscape around estate planning, many are considering multi-strand solutions when it comes to passing wealth down to the next generation, and for some, JISAs are playing a part in that.”

Contributions are usually treated as gifts

Money paid into a JISA is generally treated as a gift to the child and cannot normally be reclaimed by the person making the contribution.

Depending on the circumstances, gifts may fall outside the contributor's estate for IHT purposes. The tax treatment of gifts will depend on individual circumstances and the relevant gifting rules in force at the time. For more information about gifting and tax, visit the government website.

Tax-efficient growth

Any investment growth, interest or income generated within a JISA is free from UK Income Tax and Capital Gains Tax.

This allows savings and investments to grow without creating an ongoing personal tax liability for the child.

Building wealth for the next generation

Regular contributions could be a good way to help reduce income tax and build a meaningful financial foundation for a child over the long term.

For families already considering making gifts, a JISA may provide a structured and tax-efficient way to save or invest for a younger family member.

Long-term compounding potential

For younger children, a Stocks and Shares Junior ISA – specifically – offers a long-term investment horizon.

Contributions made over many years have the potential to benefit from big-picture investment growth, although the value of investments can fall as well as rise, and returns are not guaranteed.

Automatic transition to an Adult ISA

With some providers, like Wealthify, when the child reaches age 18, the Junior ISA automatically converts into an adult ISA.

The funds remain within the ISA tax wrapper, allowing the young adult to continue saving or investing in a tax-efficient environment if they choose to do so.

For some families, the combination of gifting, tax-efficient growth, and long-term investing may make a JISA a useful component of broader intergenerational financial planning – and it is worth remembering that any JISA contributions will not be accessible until the named child turns 18. However, it should be considered alongside wider financial and estate planning objectives rather than as a standalone solution.

Remember, tax treatments depend on individual circumstances and may change in the future. The value of investments can go down as well as up, and investors may get back less than they put in.

What if my child has a Child Trust Fund?

If your child already has a Child Trust Fund (CTF), you can transfer it to a JISA at any time.

Many families actually choose to transfer because JISAs often provide:

Greater investment choice
Potentially lower charges
Easier account management
More flexibility for long-term investing

Importantly, transferring a CTF does not affect the ownership of the money, and this remains with the child.

How Wealthify can help

The upcoming pension and inheritance tax changes are prompting many families to rethink how they pass on wealth to the next generation.

Whether you're considering reviewing your pension strategy, exploring a Personal Pension (SIPP), or building a long-term savings plan for your children through a Junior ISA, planning ahead could help you make the most of the options available.

At Wealthify, our Junior ISA and SIPP solutions are designed to make investing straightforward, accessible, and aligned with your long-term goals.

Explore our Junior Stocks and Shares ISA and managed Personal Pension to see how we could help you prepare for the changes ahead and build a financial legacy for your family.

Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.

With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.

Wealthify does not provide advice. If you’re not sure whether investing is right for you, please speak to a financial adviser.