In this work, the effect of Fe2O3 addition on the microstructure and piezoelectric properties of Pb(Zn1/3Nb2/3)0.2Ti0.4Zr0.4O3 (0.2PZN–0.8PZT) ceramics were investigated. The studies indicated that the solution limit of Fe2O3 in the lattice of perovskite structure was about 0.1 wt%. Phase analysis shows that small addition of doping Fe2O3 results in the phase evolution from rhombohedral to tetragonal, sharp decrease of the Curie temperature, and remarkable increase of the grain size. Meanwhile, Fe2O3 addition within the solution limit led to the increase of the εr, kp, and d33. It is believed that the variation in the dielectric and piezoelectric properties are closely related to the microstructure change, phase evolution, and tetragonal distortion as Fe2O3 added.