For many UK savers, a Self-Invested Personal Pension (SIPP) has been more than just a retirement plan. Thanks to existing rules, SIPPs have often been used to pass Wealth efficiently to the next generation. That advantage is set to shrink dramatically from April 2027, when the government plans to bring most unused pension funds within the Inheritance Tax (IHT) net.

SIPP investors may want to start preparing now.

What is changing in 2027?

Under the proposed rules, defined contribution pensions, including SIPPs, will be included in a person's estate for inheritance tax purposes on death. The basic nil-rate band of £325,000 and the residence nil-rate band of up to £175,000 will still apply, but any pension wealth above those allowances could be taxed at 40%.

Transfers to spouses and civil partners are expected to remain exempt.

How is this different from today?

Currently, most unused pension funds can be passed on without inheritance tax. If the saver dies before 75, beneficiaries can often access the pot tax-free, subject to limits. After 75, beneficiaries pay income tax on what they take out, but the pot itself is not in the estate for IHT.

The 2027 changes layer an IHT charge on top of the existing income tax rules, raising the prospect of pension money being taxed at both levels.

Will pensions be taxed twice?

According to industry reports, some pension wealth could face both inheritance tax and income tax. The government is reportedly considering how to limit the combined effect, but the final rules have yet to be finalised.

Why does this matter for SIPP investors?

SIPPs are popular with high earners, Business owners and engaged retail investors, many of whom hold significant balances. These savers are particularly likely to be affected by the changes.

A SIPP held alongside a family home and ISAs could push an estate well past the available thresholds, creating a substantial IHT charge.

What can savers do now?

Reviewing the expression of wishes form is a sensible first step, ensuring the right people are nominated. Many SIPP providers allow this update to be made online.

Some savers may also consider:

1. Drawing pension income earlier

Using SIPP withdrawals during retirement, rather than leaving the pot untouched, can reduce the amount left in the IHT net at death. However, more income now means more income tax now.

2. Using ISAs and other allowances

Shifting some retirement income to ISAs and cash savings reduces the pension balance and provides more flexible, tax-free income for the saver.

3. Lifetime gifting

Regular gifts out of income or one-off gifts using the seven-year rule could help reduce the eventual estate. Care is needed to avoid running out of money in retirement.

4. Reviewing pension nominations

Updating expressions of wishes and discussing them with beneficiaries can prevent confusion and delays after death.

Should you cash in your SIPP early?

Probably not without advice. Drawing too much, too soon can trigger high income tax bills and reduce the long-term value of the pension. Each saver's situation is different.

Why this matters now

With less than two years until the rules change, SIPP investors have a limited window to review their plans. Quick wins like nomination updates and a pensions audit may help, while more complex strategies are best discussed with a regulated financial adviser.

Key Takeaways

  • From April 2027, unused SIPP funds are expected to fall within the IHT net.
  • Spouse and civil partner exemptions are still expected to apply.
  • Pension wealth could face combined IHT and income tax in some cases.
  • Reviewing nominations and considering ISAs and gifts can build flexibility.
  • Specialist advice may be invaluable for larger or more complex SIPP estates.

Why SIPP nominations matter more than ever

Many SIPP holders have not updated their expression of wishes since opening their account, sometimes more than a decade ago. With the 2027 IHT changes drawing closer, reviewing nominations is one of the simplest yet most powerful actions a saver can take.

Considerations include whether to nominate a spouse, children, grandchildren or trusts, and how to split benefits between them. Some SIPPs allow detailed allocations, while others operate on a simpler basis.

Common misconceptions to avoid

  • 'The 2027 rules will not affect modest pensions.' Modest pensions combined with a home and ISAs can still exceed the nil-rate bands.
  • 'I should empty my SIPP quickly.' Drawing too much can trigger high income tax bills today.
  • 'Spouses will pay IHT on inherited pensions.' Spouse transfers are expected to remain exempt.

A final word

Taking a measured, well-informed approach is one of the most important parts of any UK retirement plan. Regularly reviewing pensions, ISAs and other savings, alongside major life changes, helps ensure that your long-term goals stay on track. Working with a regulated financial adviser, and consulting trusted resources such as MoneyHelper and Pension Wise, can make complex decisions easier to navigate.