From April 2027, the price of not being married could be a 40% tax bill on your partner’s pension.
For the first time, unused DC pension assets will be pulled into an individual’s estate for Inheritance Tax, creating a major shift in how advisers plan for cohabiting couples.
This isn’t a minor tweak; it changes how wealth is passed on for millions of UK households.
There are ways to mitigate the impact, including structures that fall outside IHT and avoid the administrative burden families could face from 2027.
What’s Changing
What’s changing from 6 April 2027?
• Unused DC pension assets (including drawdown) will be included in the estate for IHT
• Potential 40% IHT charge before income tax
• Spousal exemption still applies — but not to unmarried partners
• Personal representatives must report and settle the IHT (not pension providers)
The Treasury has long been concerned that pension pots were being used as inheritance vehicles rather than retirement income. The 2027 reforms are designed to align pension taxation with broader IHT policy.
For families already dealing with bereavement, this introduces an extra layer of complexity: personal representatives must calculate the taxable value of the deceased’s drawdown pension, report it to HMRC, and settle the liability, with no access to the pension fund itself to do so.
This has huge implications for unmarried couples, because the spousal exemption, which also extends to civil partners, does not apply to unmarried partners- even if they’ve lived together for decades. The spousal exemption ensures that a surviving spouse pays no IHT.
Therefore, the consequences will be more severe for cohabiting couples than for married ones. The previous system allowed pensions to be:
- 100% IHT‑free, regardless of pot size
- Very tax‑efficient for passing wealth to partners or children (even though the Government never intended pension assets to be used as an estate/legacy planning solution.
Because annuitised funds fall outside the deceased’s estate (unless there is a death benefit attached), LCA’s Flexible Pension Annuity (FPA) becomes a structurally efficient option for clients who may otherwise face punitive tax exposure from 2027.
LCA’s FPA addresses the shortcomings of drawdown in a post April 2027 world:
- Before 2027:
- Beneficiaries (married or not) could receive the entire pension tax‑free if death occurred before 75
- Even after 75, they only paid income tax—not IHT
- From 6 April 2027:
- A partner who is not married may see 40% of the inherited pension lost to IHT before they even withdraw it. This is a double hit because:
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- IHT is applied first (up to 40%),
- Income tax may then apply when the remaining funds are withdrawn (depending on their tax band).
- Purchasing a lifetime annuity, including the FPA, changes the shape and form of pensions from pension assets (which will be included in the deceased’s estate) to annuitised funds (which fall outside of IHT scope unless there is a death benefit associated with the annuity). There is no death benefit associated with the FPA.
- Unlike conventional annuities, the Protected Cell Company framework ensures unused funds do not revert to the insurer. They are ring‑fenced within the client’s cell, meaning the value is preserved and returned to the estate — a feature unique to LCA in this market.
- When an FPA annuitant dies, the funds are returned to their estate as opposed to a named beneficiary (unless the Preference Share has been gifted). From 2027, income will continue to be deducted from the payments to beneficiaries of a person in drawdown. But even before that, IHT will be deducted if there is a liability.
In the case of drawdown, personal representatives, not pension providers, will be responsible for reporting and paying any IHT due on these pension funds from April 2027 onwards. This is likely to be administratively messy, especially during a period of bereavement. Prior to the April 2027 changes when pensions fall outside of IHT scope, pension funds were typically used to settle any IHT liability. Those before-tax buffer funds will no longer be available to settle the deceased overall IHT liability. This is not the case with the FPA. If there is a residue in the Cell, those funds are returned directly to the estate.
What advisers should do now:
✓ Review clients in drawdown, especially unmarried couples
✓ Reassess IHT exposure under the 2027 rules
✓ Consider whether drawdown remains appropriate after April 2027
✓ Explore annuity‑based options that fall outside IHT scope
✓ Identify clients motivated by estate preservation and tax certainty
The 2027 changes represent one of the most significant shifts in pension taxation in over a decade. For advisers, the challenge is clear: ensure clients aren’t sleepwalking into unnecessary IHT exposure. For many, a move away from drawdown, and towards structures that both protect value and remove administrative burden, will become an essential part of future retirement planning.
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