The £400,000 mistake some couples may make before April 2027

The One-Day Problem Nobody's Talking About

I was walking the dogs when something clicked.

We have all been talking about pensions entering the inheritance tax calculation since the Reeves budget in October 2024. The commentary, the articles, the industry conferences — they have all focused on the big picture: from 6 April 2027, unused defined contribution pension funds will be included in the estate for IHT purposes.

But the gap between two deaths — nobody is talking about it.

Not the pension providers. Not the commentators. Not the trade press. And certainly not the families who may be walking straight into it.

What happens when one spouse dies just before 6 April 2027 and the other dies just after? The answer is uncomfortable, and the numbers are significant.

The Simple Example That Shows What Can Happen

Let us take a straightforward example.

Mr Smith is married. He is over 75. He has a defined contribution pension worth £1 million. Like most people, he has nominated his wife as the beneficiary of his pension. It is what he was told to do years ago, and he has never changed it.

Mr Smith dies on 5 April 2027 — the last day under the current rules.

Under the rules in force at the date of his death, his pension passes to Mrs Smith. There is no inheritance tax on the pension. The spousal exemption applies, and in any case, pensions are not yet within the scope of IHT. Mrs Smith receives the pension fund. She is now the member.

Mrs Smith dies the very next day — 6 April 2027 — the first day under the new rules.

What happens to that £1 million pension now?

The Answer Most People Get Wrong

Many people assume the pension stays "protected" somehow. It was inherited before the rules changed, so surely it is grandfathered? Surely the fact that Mr Smith died under the old rules means the pension keeps its pre-2027 status?

No. That is not how the legislation works.

The technical reality is this: once the pension becomes Mrs Smith's asset, it is tested under the rules in force at her date of death. Not his. Not the date it was inherited. Her date of death.

Mrs Smith dies on 6 April 2027. The new rules apply. Her £1 million pension is now included in her estate for inheritance tax purposes.

The Double Tax Sting

It gets worse.

Mr Smith died aged over 75. That means income tax applies when pension benefits are drawn down by beneficiaries. That rule has not changed.

So the £1 million pension faces inheritance tax first:

• IHT at 40%: £400,000
• Remaining pension: £600,000

Then income tax applies when the children withdraw the remaining £600,000:

• At 20% basic rate: £120,000 in income tax
• At 40% higher rate: £240,000 in income tax
• At 45% additional rate: £270,000 in income tax

The Alternative Nobody Mentions

Now consider what happens if Mr Smith had nominated his adult children directly, instead of his wife.

Mr Smith dies on 5 April 2027. His pension passes to his adult children. Under the rules at his date of death, there is no inheritance tax on the pension — the same as the original scenario.

But here is the difference: the pension never becomes Mrs Smith's asset. It never enters her estate. It sits in beneficiary drawdown in the children's names.

When Mrs Smith dies the next day on 6 April 2027, the pension is not part of her estate. It does not reappear. It is not tested under the new rules because it is not hers.

This Turns Decades of Wisdom on Its Head

For as long as I can remember — and I have been in this industry for over 45 years — the standard advice has been: leave your pension to your spouse.

It made sense. The spousal exemption meant no IHT on the first death. The surviving spouse could draw from the pension as needed. Simple, clean, conventional.

After 6 April 2027, under the "new normal," that may still be the right answer for many couples. The spousal exemption continues to apply.

But in this window — the period where one death might occur before the deadline and another after it — the traditional answer might be the most expensive one a family ever follows.

The Questions That Matter

This is not a simple "change your nomination and forget about it" situation. The right answer depends on individual circumstances. The questions that matter include:

• Does the surviving spouse actually need income from the pension? If there are other assets, other income sources, the answer may be no.
• What other assets does the couple hold? Property, ISAs, savings — are there sufficient resources outside the pension?
• What is the health position of both spouses? Life expectancy matters. If both are in poor health, the sequencing risk is acute.
• What are the family relationships like? Nominating children requires trust and confidence in those relationships.
• How large is the pension relative to the overall estate? A £50,000 pension is a different conversation from a £1 million one.

Most people have not reviewed their pension nominations in years. Many do not even know who they have nominated.

Why This Matters Right Now

The law does not care about fairness. It does not care that Mr Smith saved diligently into his pension for 40 years. It does not care that he was told to nominate his wife. It does not care that the rules changed the day after he died.

Inheritance tax is triggered by the date of death. The rules that apply are the rules in force on that date. There is no carve-out for pension pots that were accumulated or inherited before 6 April 2027.

This raises a question that more and more families are asking: why save into a pension if 40%, 60%, or even 87% of it can be taken in tax?

The answer is that pensions remain valuable — but the planning around them needs to change. Spousal bypass strategies, which were considered niche just a few years ago, now need fresh and urgent attention.

This Is Not Scaremongering

Not every couple will face this scenario. Many couples will live well beyond April 2027, and the sequencing risk will not arise. For those couples, the new rules create different challenges that require different solutions.

But some couples will face exactly this situation. One death before the deadline, one after. And they deserve to know about it before it happens, not after.

This is not speculation or opinion. This is reading the legislation and following it to its logical conclusion. The Finance Bill 2025-26 includes defined contribution pensions in the inheritance tax calculation from April 2027. There is no grandfathering provision. There is no transitional relief for inherited pensions.

The maths is straightforward. The consequences are significant.

The Conversations That Need To Happen

"Darling, I know this is morbid, but we need to talk about what happens to my pension if I die before April and you die after."

Nobody wants to have that conversation. But it is one of the most valuable conversations a couple can have right now.

Changing the pension nomination is the first step. It deals with the sequencing risk directly. But it is not the only step.

Couples should also consider whole of life assurance written in trust as a backstop. If the sequencing risk materialises despite planning, insurance can provide the liquidity to pay an inheritance tax bill without the family having to liquidate the pension at punitive tax rates.

What to do now (in plain English)

Three steps. None of them are complicated.

1. Dig out your current pension nominations. Check who you have nominated as beneficiary on every pension you hold. If you do not know, contact your pension provider and ask. Many people are surprised by what they find — or by the fact that they never completed a nomination at all.
2. Sense-check whether your spouse really needs the pension pot. Look at the full picture: property, savings, ISAs, other pensions, state pension entitlement. If the surviving spouse has sufficient income and assets without the pension, the case for nominating children directly becomes much stronger.
3. Speak to a regulated financial adviser. This article provides general information to help you understand the issue. It is not personal advice. Your circumstances are unique, and the right answer depends on the full picture of your finances, your health, your family, and your objectives.