Your SIPP Is Now Part of Your Estate
What the 2027 Inheritance Tax Change Means for Drawdown
For decades, pensions sat outside your estate for inheritance tax purposes — making a SIPP one of the most tax-efficient ways to pass wealth to your children. From 6 April 2027, that changes. The Autumn Budget 2024 brought unused pension funds inside the IHT net, and the implications for anyone with a sizeable pension pot are significant.
What Changed and When?
Chancellor Rachel Reeves announced at the Autumn Budget on 30 October 2024 that unused defined contribution pension funds — including SIPPs and drawdown pots — will be brought into the deceased's estate for inheritance tax purposes from 6 April 2027. This has since been confirmed in the Finance Bill and is proceeding into law.
What Exactly Is In Scope?
- • Uncrystallised pension funds (not yet touched)
- • Funds held in drawdown (crystallised but unspent)
- • Both are included at whatever value remains at death
- • Applies to registered pension schemes including SIPPs, workplace DC pensions
What's Exempt?
Not everything falls into the new rules. The following remain outside the estate:
- Pension paid to a surviving spouse or civil partner — still fully exempt from IHT under the spousal exemption
- Death-in-service lump sums paid from a registered pension scheme — excluded
- Benefits paid to a registered charity — exempt
- Defined benefit scheme death benefits paid as dependant's pension — generally outside the estate
The Double Tax Problem
The really uncomfortable part is what happens when your beneficiaries actually draw down an inherited pension. They face two separate taxes:
| Tax | Rate | On What |
|---|---|---|
| Inheritance Tax | 40% | Pension pot above nil-rate band threshold |
| Income Tax (on drawdown) | up to 45% | Withdrawals taken by beneficiary |
| Combined effective rate | up to 67% | On the same pension pounds |
Example: £500k pension pot. After IHT at 40% = £300k passes to beneficiary. They then pay 45% income tax on withdrawals = £165k net. From £500k, only £165k reaches your child.
Who Is Most Affected?
The change hits hardest if:
- You have a large pension pot and a taxable estate (above £325k nil-rate band, or £500k with residence nil-rate band)
- You planned to leave your SIPP untouched and live off ISAs or other assets first
- Your beneficiaries are higher-rate taxpayers who will pay 40-45% income tax on withdrawals
- You are single — the spousal exemption won't apply on first death
Who Is Less Affected?
- • Married couples — the spousal exemption still applies on first death
- • Those whose total estate stays below the nil-rate band (£325k / £500k with property)
- • Those planning to spend their pension down fully in retirement anyway
- • Those naming a spouse as primary beneficiary
What Should You Do About It?
The most important thing right now is to not panic and not take drastic action. April 2027 is still over a year away and the legislation may yet be amended. That said, there are some sensible things to think through:
1. Reconsider the Order You Draw Down
Many people historically preserved their pension and spent ISAs and other savings first, because pensions sat outside the estate. With that advantage gone, there's less reason to defer drawing your pension. Spending your pension down in retirement rather than leaving it means less IHT exposure.
2. Review Nomination of Beneficiaries
Ensure your pension nominations are up to date. Nominating a spouse on first death preserves the spousal exemption — the pension passes free of IHT and your spouse can then draw it down at their own marginal rate.
3. Consider Gifting Earlier
If your estate is large, gifts made more than 7 years before death fall outside the estate. This isn't pension-specific but becomes more relevant when the pension can no longer do the estate-planning job it once did.
4. Talk to a Financial Adviser
This is one of those areas where personalised advice genuinely matters. The interaction between IHT, income tax, your spouse's position, and your drawdown strategy is complex enough that generic guidance has real limits.