Pension pots pulled into IHT net: Advisers urge urgent planning ahead of 2027 reforms

In a conversation exploring the evolving landscape of pensions and inheritance tax (IHT), Chartered Financial Planner, Rob Hodgson, offered a deep dive into how recent legislative changes are transforming long-standing strategies – and why both private clients and financial advisers must pay attention.

Hodgson, who joined Vermeer Financial Planning in 2024 as Financial Planning Director, brings nearly two decades of experience advising high-net-worth individuals, families, and entrepreneurs. He said the current pace of legislative change is reshaping established approaches to wealth structuring.

Following Rachel Reeves’ budget announcements last October, pension legislation has taken centre stage in financial planning. Hodgson pointed out that changes to how pensions will be treated for inheritance tax has “required significant numbers of clients to completely reassess their existing financial plans”. He said:

“The existing rules have meant that pensions sat outside of the inheritance tax calculation, so when advising clients, especially those concerned about estate planning, advisers have typically suggested drawing down first from investments that fall within the IHT net, while preserving pensions.”

But under Labour’s proposed reforms – due to take effect from April 2027 – unused pension pots will now be pulled into the IHT calculation. Hodgson said:

“That’s a huge change, and probably the headline takeaway for anyone advising private clients. It has fundamentally altered the role pensions play in estate planning.”

Thomas Johnson, Financial Planning Director at Simpson Wood Limited, echoed Hodgson’s concerns. He commented:

“Previously, pensions were a golden IHT loophole. That’s now being closed. Beneficiaries could be hit with a 40% bill unless action is taken. If a pensioner dies after the age of 75, there could even be double taxation – 40% IHT on the pot, then income tax on withdrawals. It’s critical that clients with sizable pension assets take advice now.”

Both advisers agree the changes have prompted clients to re-evaluate long-standing assumptions about how and when to access their pensions. Hodgson notes that some clients are now considering extracting tax-free cash and gifting during their lifetime – in line with the ‘seven-year rule’, where gifts fall outside the estate if the donor survives seven years.

Johnson added that the behavioural shift is particularly pronounced among younger clients:

“It’s always been a challenge getting under-45s to prioritise pensions. The IHT angle was one of the few levers that worked. With that gone, it’s harder to make the case – especially when people are juggling mortgages and childcare. But ironically, it’s more important than ever to grow wealth tax-efficiently given other traps like losing free childcare hours once income exceeds £100k.”

Both Hodgson and Johnson have seen a sharp uptick in interest in protection products. Hodgson said:

“One of the more unexpected winners from these changes may be large insurers. Clients are increasingly considering life insurance policies to cover an IHT liability which has increased due to the incoming inclusion of pension pots.”

Johnson agreed, explaining:

“We’re doing a lot with life cover paid into trust to insure the liability on death. We also advise clients to draw pension income up to the higher-rate threshold, then either spend, gift using the surplus income rule, or place into IHT-efficient vehicles. As liabilities reduce over time, the cover can be scaled down.”

For both advisers, personalised cashflow modelling is now central. “You can’t give good advice without understanding how all the moving parts – pensions, IHT, investments – interact,” Hodgson emphasised. His team creates dynamic models that simulate future scenarios, helping clients test the impact of withdrawals, gifts, or insurance strategies under various assumptions.

With the 2027 changes looming and finer details still under debate, both Hodgson and Johnson predict growing demand for ongoing high-quality, strategic financial planning. Clients will need clarity, tailored advice, and expert navigation to manage the changes ahead.