There's a change coming in April 2027 that will fundamentally alter the way British families think about pensions, and it's one that hits expats disproportionately hard. From that date, most unused pension funds and death benefits will be included in your estate for Inheritance Tax purposes.

If that sounds like a technical adjustment, let me put it in terms that are harder to ignore: under the current rules, your pension sits outside your estate. You can pass it to your children, your spouse, or anyone else free of IHT. It's been one of the most powerful estate planning tools available for decades. From April 2027, that protection disappears.

For the average UK-resident retiree, this is concerning. For British expats with large pension pots who've structured their affairs around the assumption that pensions are IHT-exempt, it's potentially devastating.

What's Actually Changing

Currently, when you die, your defined contribution pension passes to your nominated beneficiaries outside of your estate. If you die before 75, those beneficiaries receive the funds tax-free. If you die after 75, they pay income tax at their marginal rate on any withdrawals — but crucially, no Inheritance Tax.

From April 6, 2027, the value of your unused pension funds will be added to your taxable estate. The IHT nil-rate band remains at £325,000 (where it's been frozen since 2009). The residence nil-rate band adds up to £175,000 if you're passing your home to direct descendants. Anything above that combined £500,000 threshold faces IHT at 40%.

Here's where the maths gets genuinely alarming for larger pension pots. If you die after age 75 with, say, £800,000 in unused pension funds, your beneficiaries face: first, IHT at 40% on the amount above the nil-rate band (assuming the pension pushes the estate over the threshold). Then, income tax at the beneficiary's marginal rate when they draw down what's left. The combined effective tax rate on inherited pension funds can reach 67% — or higher if the beneficiary is an additional rate taxpayer.

Two-thirds of a pension that was built over a lifetime of disciplined saving, taken in tax.

Why This Hits Expats Harder

You might assume that being non-UK-resident protects you. In some respects it does — the UK's IHT rules for non-domiciled individuals mean that if you've been non-UK-resident for at least 10 of the last 20 tax years, your non-UK assets fall outside the IHT net. But there's a critical distinction: a UK-registered pension is treated as a UK-sited asset regardless of where you personally reside.

That means if you're a British expat in Dubai, Singapore, or anywhere else, and you hold a SIPP, workplace pension, or any other UK-registered scheme, it's caught by the new rules. It doesn't matter that you've been outside the UK for twenty years. The pension is UK-sited, so it's in your UK estate for IHT purposes.

This creates a particularly painful interaction with the non-dom regime changes that came into effect in April 2025. The abolition of the remittance basis means that long-term non-doms who've returned to the UK are now taxed on worldwide income. If those same individuals have large UK pensions — which many do, from careers that began in the UK before they went abroad — they face a new IHT exposure that simply didn't exist before.

The Planning Responses

We've spent the last six months working through the implications of this change with clients across the UAE, EU, and UK. The responses vary depending on individual circumstances, but several themes keep emerging.

Accelerated drawdown before April 2027. For clients who are already in retirement or approaching it, there's a rational case for drawing down more of the pension before the IHT rules take effect. Money taken out of the pension and spent, gifted, or invested in non-UK assets is no longer in the estate. The trade-off is that withdrawals are subject to income tax — but if the alternative is 40% IHT plus income tax on what's left, the calculus often favours earlier drawdown.

This requires careful modelling. Drawing too much too fast can push you into the additional rate band, eroding the benefit. We build tax-year-by-tax-year drawdown models that optimise the balance between income tax now and IHT later. For one client with a £1.2m SIPP, the optimal strategy was to withdraw £95,000 per year for three years before April 2027 — enough to reduce the IHT-exposed pot materially while staying within the higher rate band.

Whole-of-life insurance. For clients who want to preserve their pension for beneficiaries rather than accelerate drawdown, a whole-of-life policy written in trust can provide a lump sum on death that covers the projected IHT liability. The policy sits outside the estate (because it's in trust), and the premiums are funded from pension income or other sources. The economics work particularly well for healthy clients in their late 50s or early 60s, where premiums are still manageable relative to the sum assured.

Spousal bypass trusts. Where the pension is intended for a surviving spouse, the spousal exemption from IHT still applies — transfers between spouses are exempt. But on the second death, the full value of the remaining pension is exposed. Spousal bypass trusts, where the pension death benefits are paid into a discretionary trust rather than directly to the surviving spouse, can provide flexibility in managing the second-death exposure. The trustees can then distribute funds to the surviving spouse and other beneficiaries in a tax-efficient manner over time.

Relocation of pension assets. This is the most aggressive option and the one we recommend most cautiously. Transferring a UK pension to a QROPS in a jurisdiction where the pension would not be subject to UK IHT is theoretically possible, but the 25% Overseas Transfer Charge, the loss of FCA regulation, and the ongoing tightening of QROPS rules make this a diminishing option. For most clients, the cost of transfer now exceeds the IHT saving.

The National Insurance Sting in the Tail

While everyone's focused on pensions and IHT, there's another change coming in April 2026 that affects expats' long-term retirement position: the elimination of voluntary Class 2 National Insurance contributions for people living abroad.

Until now, expats could pay voluntary Class 2 NI at £3.45 per week to maintain their UK State Pension entitlement. From April 2026, this option disappears. The alternative — Class 3 voluntary contributions — costs £18.40 per week from April 2026, roughly five times more. And the minimum UK residency requirement for voluntary NI contributions is rising from 3 years to 10 years.

For younger expats who left the UK early in their careers, this could mean losing eligibility for the full State Pension entirely. At the full rate of £241.30 per week from April 2026, that's a benefit worth approximately £12,550 per year — or roughly £250,000 over a 20-year retirement. The deadline to fill gaps in your NI record at the old Class 2 rate is approaching fast.

The Broader Picture

What strikes me about both of these changes — pensions into IHT and the NI contribution shift — is that they share a common thread. The UK government is systematically closing the mechanisms that British expats have historically used to maintain and protect their pension wealth from abroad. QROPS transfers are increasingly penalised. Non-dom protections have been abolished. Voluntary NI is getting more expensive and harder to access. And now pensions themselves are being drawn into the IHT net.

None of these changes are unreasonable in isolation. Collectively, they represent a significant shift in the relationship between the UK tax system and its diaspora. If you're a British expat with pension assets in the UK, the cost of not reviewing your position — regularly, and with someone who understands both sides of the border — is higher now than it's ever been.

The clients who'll navigate this well are the ones who plan ahead. The ones who'll get hurt are the ones who assume the rules they left behind still apply.

The April 2027 pension IHT changes are confirmed but detailed guidance from HMRC is still expected. If you'd like to understand how these changes affect your specific situation, we offer a comprehensive pension and estate review for British expats. Contact us to arrange a consultation.

Xpertly Wealth provides regulated financial advice across the EU, UK, and UAE.