The announced 2027 changes are expected to protect the first death. The pressure lands on the second.
If you have been widowed, or you are thinking about what happens when the first of you dies, pensions deserve particular attention. The government has announced plans to include pension funds in your taxable estate from April 2027. This has not yet been confirmed in law and could change. For couples and surviving spouses, the announced change creates a problem that is easy to miss: not at the first death, but at the second.
Under the announced framework, pension funds passing to a surviving spouse or civil partner are expected to be exempt, in line with the general spouse exemption that applies to everything else you leave each other. The precise mechanics await final legislation, but the announced intention is that widows and widowers would not face an inheritance tax bill on a pension inherited from their husband, wife, or civil partner.
On income tax, the current rules for inherited pensions would continue to matter: if the original pension holder died before age 75, withdrawals are generally free of income tax, subject to allowances. If they died at 75 or later, the survivor pays income tax at their own rate on what they draw.
The real effect of the announced change falls on the surviving spouse's estate. A widow or widower typically ends up holding the couple's combined wealth: the home, the savings, and, from April 2027 under the announced plans, both pension funds. All of it would be measured against the survivor's allowances at the second death.
A million pounds of allowances sounds substantial. But a family home, a lifetime of savings, and two pension funds can pass it quickly. An estate that sits comfortably below the threshold under today's rules can move firmly above it the moment pensions are counted.
There is a further complication for larger estates: the residence nil-rate band is tapered away once an estate exceeds £2 million. Adding pension funds to the estate could push a surviving spouse over that line, reducing allowances at exactly the moment the estate has grown. We cover this in detail in the £2 million trap.
Know your combined position. Most couples have never added up both pensions alongside everything else. That single exercise, done honestly, tells you whether the announced change is a footnote for your family or the difference between no bill and a substantial one.
Review the order you spend from. The old logic of preserving pensions and spending other savings first may no longer serve a surviving spouse whose estate would exceed the allowances. Drawing on pension income for living costs, or for regular gifts out of surplus income, may become the more efficient order if the change is confirmed.
Check nominations and paperwork. Pension death benefit nominations, expression of wishes forms, and both wills should reflect what you actually want to happen at each death. Transferred allowances must be claimed by whoever administers the estate, and the home must pass to direct descendants for the residence allowances to apply.
Take advice before big moves. Withdrawals, transfers, and gifts each carry their own tax consequences today. A specialist can weigh those certain costs against the announced, but not yet confirmed, future rules.
Our calculator handles widowed positions properly: transferred nil-rate bands, transferred residence allowances, and the choice to model your estate with or without pensions included from April 2027. Ten minutes gives you both numbers, and a clear view of whether the second death problem applies to your family.