Significant changes to the taxation of pensions on death are coming your way from 6 April 2027. For many individuals, particularly doctors, dentists and other medical professionals with substantial NHS and private pension arrangements, these reforms could materially increase the Inheritance Tax (IHT) payable by their beneficiaries. 
For many, private pensions, whether they were destined to be a primary source of income in retirement or a supplementary source alongside the final salary scheme, such as the NHS pension scheme, had the added benefit of inheritance tax efficiency. Anything you didn’t spend in your lifetime could be handed to your family without inheritance tax. That long-standing advantage is all about to change.
For many doctors and dentists, the forthcoming change will make it essential to review pension beneficiary nominations (who gets the proceeds on death) and reconsider existing estate and inheritance tax planning.
Below is a clear summary of what is changing, why it matters, and the key financial planning points worth considering now.
What’s changing?
From 06 April 2027, most unused pension funds and pension death benefits will be treated as part of your estate for IHT purposes. This ends the long‑standing position where pensions sat outside the estate and could be passed on free of IHT. This has been a tax-efficient way of handing wealth onto the next generations. But no more!
These new rules apply to:
- SIPPs and personal pensions
- Cash balance and collective money purchase schemes
Some benefits remain exempt, including:
- Dependants’ scheme pensions
- Joint life annuities
- Charity lump sum death benefits
- Defined benefit death-in-service lump sum benefits, including those provided by the NHSPS.
Why this matters, especially for UK doctors and dentists
If you work in medicine or dentistry, you may be more exposed to these changes than most.
Between the NHS pension scheme, private pensions, and SIPPs, many clinicians will have pension values that, when added to their estate, will far exceed the IHT allowances.
A quick inheritance tax refresher
Every individual currently has a £325,000 Nil Rate band.
In addition, where certain conditions are met, there is a Residential Nil Rate Band (RNRB) of up to £175,000 when passing the family home to direct descendants. This means many people can potentially pass on up to £500,000 free of IHT. Married couples and civil partners can usually transfer unused allowances, potentially allowing up to £1 million to pass free of IHT.
However, it is important to remember that the Residential Nil Rate Band begins to taper away once the estate exceeds £2 million, disappearing altogether for larger estates.
For many clinicians, the inclusion of pension assets could push the value of their estate beyond this threshold, resulting in the loss of valuable relief.
Multiple income streams and pensions
Doctors and dentists often have several income streams: NHS income, private practice income, locum work, and limited company profits, which often lead to several pension arrangements. These pensions are all now potentially within the IHT calculation.
Regaining your Personal Allowance
For higher earners, contributing to personal pensions is an established way of bringing taxable income back below £100,000, as contributions reduce ‘net relevant earnings’. This can restore your personal allowance and help avoid the dreaded 60% tax trap.
Between £100,000 and £125,140, every £2 of additional income reduces your personal allowance by £1. The combined effect of paying 40% income tax while simultaneously losing tax-free personal allowance creates an effective marginal tax rate of 60%.
For many clinicians, pension contributions remain one of the most effective ways of mitigating this tax charge.
How will the tax be paid?
Responsibility for reporting and paying Inheritance Tax (IHT) initially falls to the Personal Representatives (PRs), either the Executors named in your Will or the Administrators appointed if there is no Will. Pension providers will require identity verification before releasing information or benefits.
PRs can ask pension providers to withhold up to 50% of a beneficiary’s entitlement for up to 15 months to ensure sufficient funds are available to settle any IHT due. Once pension benefits are distributed, beneficiaries become jointly responsible for any unpaid IHT relating to those benefits.
IHT is generally payable within six months of death. Late payments attract interest at the Bank of England base rate plus 4%, making delays potentially costly.
Should IHT be paid from pension assets or other assets?
There is no single answer. The most tax-efficient approach will depend on your personal circumstances, your beneficiaries’ tax positions, and the assets within your estate. This is an area where personalised financial advice is recommended to discuss the options with your adviser.
Key planning points to review now
1. Review your pension death benefit
Many of our clients have added children or grandchildren as beneficiaries, often by allocating them a small percentage, such as 1%. Historically, this could provide valuable tax advantages, but the new rules mean these nominations should be reviewed.
In some cases, nominating a spouse or civil partner may be more tax-efficient, as transfers between spouses are generally exempt from Inheritance tax. This can preserve greater flexibility, allowing wealth to be passed on later through lifetime gifting or other Inheritance tax planning strategies.
However, there is no one-size-fits-all. It still may be worth considering children or grandchildren if they are in a lower tax bracket than your spouse.
The right approach will depend on your family’s circumstances, the size of your estate, and the tax position of each beneficiary. As these factors can change over time, it’s important to review your nominations regularly with your financial adviser.
2. Aligning nominations with your Will
The £325,000 nil rate band will be shared between your estate and your pension. Your Will and pension nominations should be reviewed together to ensure the nil rate band is used effectively.
3. Managing illiquid pension assets
If your pension holds commercial property or unlisted investments, consider whether your estate has enough liquidity to pay IHT without delays.
4. Communicating your intentions
Where pension death benefits are paid at the scheme’s discretion, making your wishes known can reduce disputes and avoid delays that trigger late payment interest.
What you should do next and how we can help
- Review pension nominations
- Revisit your Will
- Consider how any future IHT liability will be funded
- Review pension investment strategy, especially where illiquid assets are held
- Model potential IHT liabilities under the new rules
Final thoughts
Pensions remain a powerful planning tool, but from 2027, they will require more careful integration with estate planning. If you have NHS and private income, multiple pension arrangements, or illiquid assets inside a SIPP, the impact may be significant.
A review now with your financial adviser can help ensure your arrangements remain efficient, flexible, and aligned with your long-term goals. We are here to help, so please get in touch if you need clarification on any aspect of this article – there is a lot to take in!
Tax is dependent on your own circumstances and personal situation, and is subject to changes based on UK legislation and taxation regime. This article is based on our understanding of current legislation.
Estate planning and Will writing are important aspects of your financial planning. We always request that you seek appropriate guidance to ensure your wishes are correctly reflected in any document.
Are you concerned about inheritance tax implications on your pension? Let us know by leaving a comment below.