For British expats who hold Self-Invested Personal Pensions (SIPPs) or other defined contribution (DC) schemes, these changes are more than just technical adjustments.
From 6 April 2027, the UK government will significantly alter the tax treatment of pensions at death. They mark a fundamental shift in how retirement wealth can be passed on to your loved ones. This results in larger tax bills, more administrative hurdles, and less certainty for beneficiaries.
1. What’s Changing in 2027?
Historically, unused pension pots such as SIPPs have been exempt from UK Inheritance Tax (IHT). This made pensions an efficient way to pass on wealth, especially for expats who often use pensions not just for retirement income but also as part of broader estate planning. From April 2027, this is set to change.
The UK Autumn Statement confirmed that from 6 April 2027:
- Most unused DC pensions, including SIPPs, will be included in the estate for IHT purposes.
- Pension scheme administrators (PSAs) will be responsible for reporting the value to HMRC and paying IHT directly from the fund.
- Transfers to a surviving spouse or civil partner will remain exempt, but all other beneficiaries may face a 40% IHT charge.
- If the deceased was over 75, income tax will also apply to any pension income taken by beneficiaries.
The result is a potential for double taxation — up to 40% IHT plus as much as 45% income tax.
2. Why Is This Happening?
The UK Treasury claims this reform is about fairness. Pensions were never intended to be vehicles for passing on large sums of wealth tax-free. Yet with the rise in SIPP usage among the financially aware — including many British expats — these structures became popular estate planning tools.
The government estimates that around 38,000 estates a year will pay more tax under the new rules. They also predict the average additional IHT bill will rise by about £34,000. In short, this is a revenue-raising move, dressed as reform.
For British expats who have diligently saved into their pensions expecting to leave a financial legacy, the change undermines long-term financial assumptions. More importantly, it reduces the certainty and flexibility that SIPPs once offered.
3. Who Is Affected?
The impact will be greatest for:
- British expats with large SIPP balances, particularly those exceeding the combined nil-rate bands (£650,000 for couples).
- Families where pension wealth is intended to be passed to children or grandchildren rather than a spouse.
- Expats who pass away over the age of 75, as income tax will also apply.
A typical example might be a retired British couple in Thailand with a SIPP worth £500,000. If one dies post-75 and leaves the pension to adult children in the UK, they could face a 40% IHT charge (£200,000) and then income tax on any income or lump sum withdrawn by the beneficiary.
In this scenario, the effective tax rate could exceed 60%.
4. The Current Rules (Until 5 April 2027)
Under the rules in place before the reform:
- Unused DC pensions are outside the estate for IHT purposes.
- No IHT is charged on death benefits, even for non-spouse beneficiaries.
- No income tax applies if death occurs before age 75.
- If the member dies after 75, beneficiaries pay income tax only when they access the pension.
This system rewards those who save into pensions but do not need to draw from them in retirement. It also offers simplicity for families.
From April 2027, all of this changes.
5. Key Concepts for British Expats to Understand
a. Nil-Rate Band (NRB): The standard IHT-free allowance is £325,000 per person. This can be transferred between spouses or civil partners, doubling to £650,000.
b. Residence Nil-Rate Band (RNRB): Worth up to £175,000, but only applicable when passing on a main UK residence to direct descendants. Many expats cannot use this.
c. Double Taxation Risk: A SIPP left to children could be taxed twice — once via IHT, then via income tax if taken as cash or income.
d. Reporting and Payment: Pension scheme administrators, not executors, will report the pension value to HMRC and pay IHT from the fund.
e. Exemptions: Transfers to spouses or civil partners are still IHT-free. So are charitable lump sum death benefits.
6. What Can Expats Do with SIPPs or other personal pensions?
a. Review Your Strategy
Expats should re-evaluate the role their pension(s) plays in their estate. Is it primarily a retirement income tool? Or a vehicle for inheritance?
If inheritance is the goal, the new rules reduce tax efficiency.
b. Consider Lifetime Gifts
Using surplus pension income (especially from crystallised pots) to fund gifts during your lifetime can reduce future estate values and pass on wealth in a tax-efficient way. The 7-year rule still applies, so forward planning is crucial.
c. Think About Life Insurance
One potential solution is to consider a life insurance policy written in trust, sized to cover the expected IHT liability on the SIPP. Premiums are often affordable for those in good health, and it allows the full value of the SIPP to be preserved.
d. Explore Trusts and Wrappers
While pensions themselves cannot generally be placed in trust, some UK-based and offshore investment wrappers can be structured to reduce IHT exposure. These solutions are complex and should only be considered with proper advice.
e. Speak to a Specialist
Tax planning is not one-size-fits-all. The cross-border implications for expats add further complexity. A qualified financial advisor familiar with expat issues can help assess the impact and explore mitigation options.
7. Timeline and Next Steps
- October 2024: Consultation launched by HM Treasury
- January 2025: Consultation ended
- Mid-2025: Government published draft legislation
- 6 April 2027: Changes come into force
This means there is still time to act, but doing nothing could be costly.
8. The Expat Perspective: What Makes This Different for Us?
Most UK media has focused on domestic retirees.
But British expats face additional hurdles:
- Currency risk, as SIPPs are in sterling
- Access to UK-based advisers and trustees
- Lack of visibility into UK estate rules
- Family dispersed across borders
The appeal of SIPPs to expats has always been flexibility and control. But this new policy removes one of the core benefits: IHT protection. The need for clarity, simplicity, and cross-border compliance becomes even more acute.
For expats in Thailand, Malaysia, or Cambodia — where local tax law may not recognise UK pension rules — the risk of unexpected charges or blocked transfers increases without careful planning.
9. Final Thoughts
The 2027 pension IHT reform represents a seismic shift in British retirement planning. For expats who have relied on SIPPs as a tax-efficient way to preserve and pass on wealth, the implications are clear:
- SIPPs are no longer outside the estate.
- Spouses are safe; children are not.
- The cost of doing nothing could exceed 60% of your pension wealth.
Now is the time to revisit your retirement strategy. Engage a specialist, assess your exposure, and take action while the window for planning remains open.
Get Help
British Abroad works with trusted financial advisers who understand the cross-border tax, pension, and estate issues faced by British expats in Southeast Asia.
If you’d like an introduction to a qualified professional, get in touch today at britishabroad.org/contact.