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With the changes to IHT rules on unused pensions, retirement planning and estate planning have become two very different conversations
From April 2027, unused pension pots will no longer sit outside the inheritance tax discussion. For many families, that makes alternative assets, and EIS in particular, worth revisiting.
By Nick Sudlow · 7 min read · IHT planning, pensions and EIS
For years, defined contribution pensions have often been treated as one of the most inheritance-tax-efficient assets on a family balance sheet. Where an individual had enough income or capital elsewhere, a common planning approach was to draw from ISAs, general investment accounts or other assets first, while preserving as much wealth as possible in the pension pot to minimise the IHT bill. That logic is changing.
From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased person’s estate for UK inheritance tax purposes. The reform, legislated through Finance Act 2026 and supported by further HMRC technical notes, is intended to remove what the government sees as a distortion: pensions being used increasingly as a vehicle for intergenerational wealth transfer, rather than primarily to fund retirement.
What changes from April 2027?
The new rules do not mean that every pension pot will automatically face a 40% tax charge. Inheritance tax still depends on the total value of the estate, available nil-rate bands, spouse or civil partner exemptions, charitable exemptions and the nature of the pension benefits. But the direction of travel is clear: pension wealth will increasingly need to be considered alongside the rest of a client’s estate.
For individuals with significant defined contribution pensions, the change may alter a long-established order of drawdown. The old instinct — preserve the pension, spend other assets first — may no longer be optimal where the pension itself will form part of the taxable estate. Advisers and investors may therefore need to look again at how retirement income, gifting, investment risk and estate planning work together.
Why alternative assets may become more relevant
Alternative assets are not a single solution to inheritance tax. They vary widely in liquidity, risk, regulation and suitability. However, certain qualifying investments can offer reliefs that become valuable when traditional pension planning loses some of its estate-planning advantage.
In broad terms, investors may consider assets that qualify for Business Relief, including certain unquoted or AIM-traded companies, where the investment is held for the required period and the company continues to qualify. The attraction is straightforward: instead of simply moving wealth from one taxable wrapper to another, qualifying assets may reduce the taxable value of the estate while remaining invested for growth.
The pension rule change does not remove the need for retirement planning. It makes retirement planning and estate planning harder to separate.
Where EIS fits into the conversation
The Enterprise Investment Scheme was designed to encourage investment into start-up and early stage UK trading companies. It is not a direct replacement for pensions, and it is not suitable for every investor. Capital is at risk, investments are illiquid, and tax reliefs depend on the investor, the company and the sharesmeeting qualifying conditions.
For appropriate investors, however, EIS can bring together three features that are particularly relevant in the post-2027 planning environment:
- Inheritance tax mitigation: qualifying EIS shares may become eligible for inheritance tax relief via the Business Relief mechanism after two years, provided they are still held at death and continue to qualify.
- Income tax relief: investors can currently claim income tax relief equal to 30% of the amount subscribed for qualifying EIS shares, subject to annual limits, sufficient income tax liability and the relevant holding-period rules.
- Long-term growth potential: EIS invests in early-stage and growth companies, giving investors exposure to businesses that may be capable of meaningful capital growth over time, while recognising the higher risk of loss.
This combination is why EIS should become a more prominent part of estate-planning discussions for investors who are comfortable with the risk profile and who can afford to commit capital for the long term.
For retired investors: drawing pension income and reinvesting for estate planning
For retired individuals with large pension pots, the April 2027 change may prompt a fresh look at drawdown strategy. One possible approach is to draw larger amounts from the pension during lifetime and reinvest some of the proceeds into qualifying EIS opportunities. The aim is not simply to “move money around”, but to replace an increasingly taxable pension balance with assets that may qualify for Business Relief.
The income tax position is central. Pension withdrawals are generally taxable as income, so drawing more than is needed for day-to-day spending can create a larger income tax bill. EIS income tax relief may help offset some of that liability, because qualifying subscriptions can generate relief at 30% of the amount invested, subject to the investor having enough income tax liability.
Used carefully, this can create a planning loop: take taxable pension income, use part of the proceeds to subscribe for EIS shares, claim income tax relief against the drawdown tax bill, and begin the two-year holding period for potential Business Relief. The strategy is highly individual. It depends on cash-flow needs, life expectancy, appetite for investment risk, exposure to illiquid assets and the investor’s wider estate plan. The key factor in this strategy is that the investor should be confident they will not require this money in the future, for example for ongoing living expenses or care requirements, effectively locking it away solely for the benefit of their beneficiaries.
For current savers: redirecting some pension top-ups into EIS
The rule change is not only relevant to people already in retirement. Individuals still saving for retirement may also reassess whether every additional pound of long-term savings should go into a pension. Pensions remain powerful: they offer tax relief on contributions, tax-advantaged investment growth and a core role in funding later life. But if unused pension wealth is expected to fall inside the taxable estate from April 2027, some savers may choose to diversify the destination of future top-ups.
For higher earners or individuals already on track to build substantial pension wealth, directing part of planned pension top-ups into EIS could offer a different balance of reliefs: immediate income tax relief, exposure to long-term growth companies and the potential for IHT mitigation after two years. This may be particularly relevant where the investor has sufficient pension provision, a long time horizon and the capacity to tolerate the risks of early-stage investments.
The key is proportionality. EIS should not be viewed as a wholesale substitute for pension saving. Rather, it may form part of a broader long-term plan for building wealth, sitting alongside pensions, ISAs, general investments, gifting strategies and protection planning.
The right question is no longer simply “how do I preserve my pension?” It is “which assets should fund retirement, and which should form part of the estate plan?”
Planning points to consider now
The 2027 start date may feel distant, but effective planning usually takes time. Investors and advisers may want to review:
- whether pension beneficiary nominations remain appropriate in light of the wider estate plan;
- the expected value of the estate once pension wealth is included;
- the order in which retirement assets are likely to be drawn;
- whether planned pension contributions still make sense in full, or whether some long-term capital should be allocated elsewhere;
- the investor’s capacity for loss, liquidity needs and suitability for higher-risk EIS investments; and
- how income tax, capital gains tax and inheritance tax interact across the whole plan.
A more integrated approach
The April 2027 pension IHT reform does not make pensions unattractive, nor does it make EIS suitable for everyone. Pensions will remain a cornerstone of retirement planning. But for wealthier individuals and families, the change makes the distinction between retirement planning and estate planning more stark.
That is where EIS can have an important role. For investors who understand and accept the risks, it may help mitigate inheritance tax exposure, provide valuable income tax relief and maintain exposure to companies with long-term growth potential. The result is not a one-size-fits-all answer, but a broader planning toolkit at a time when the old assumptions around pensions and inheritance tax are being rewritten.
Important information: Tax rules can change, and the availability of reliefs depends on individual circumstances and qualifying conditions. EIS investments are high risk, usually illiquid, and investors may lose some or all of the capital invested. This article is for information only and should not be treated as personal tax, investment or pension advice.