Will Your Pension Be Subject To Inheritance Tax From April 2027
Will Your Pension Be Subject to Inheritance Tax from April 2027 in the UK?
What is changing from 6 April 2027?
From 6 April 2027, the government plans to bring most unused pension funds and pension death benefits into the Inheritance Tax (IHT) net. In plain English, that means a pension pot that had previously sat outside the estate for many discretionary schemes will, in many cases, be treated as part of the deceased person’s estate for IHT purposes. The policy is designed to remove the long-standing incentive to use pensions as a wealth-transfer vehicle rather than purely as retirement income. Most estates will still not pay IHT, but for larger estates the change could be significant.
The core point is easy to miss: this is not a blanket tax on every pension. The reform applies to most unused pension funds and death benefits, but the government has confirmed that death-in-service benefits payable from registered pension schemes will be out of scope from 6 April 2027. It has also confirmed that dependants’ scheme pensions from defined benefit arrangements, and from collective money purchase arrangements, are excluded.
There is also an important distinction between current law and the new regime. At present, many discretionary pension schemes keep unused pension funds outside the estate, which is why pensions have been widely used for tax-efficient succession planning. Some non-discretionary schemes are already treated differently. From April 2027, however, the broad position changes so that most unused pension funds and death benefits will be included within the estate for IHT purposes regardless of whether the scheme trustees or administrators have discretion over the payment.
Which pensions are likely to be affected?
The draft legislation is deliberately broad. It refers to registered pension schemes, qualifying non-UK pension schemes and section 615(3) schemes, and it captures property that must be used to pay a relevant death benefit, or may be used for that purpose subject to discretion. That means the reform is aimed at the pension wealth that can pass on death, not at pension contributions or benefits already drawn and held outside the scheme.
In practical terms, that will matter most for defined contribution pots, flexi-access drawdown funds, uncrystallised funds and similar lump sum death benefits. The government’s existing guidance already shows how different pension death benefits are taxed for income tax purposes depending on age at death and timing of payment. The new IHT rules sit on top of that system rather than replacing it.
This is where many people get caught out. A pension can be free of IHT in one situation and taxable in another, and income tax can still arise separately on inherited pension payments. For example, lump sums paid from a pension are usually free of income tax if the member died under 75, but tax can arise if the payment is made more than two years after the provider was told of the death, or if the payment exceeds the deceased person’s lump sum and death benefit allowance. If the member died aged 75 or over, most lump sums are subject to income tax when paid.
It is also worth stressing what the reform does not do. The legislation specifically excludes death-in-service benefits and, importantly for directors and employees with workplace cover, those benefits are not to be brought into IHT from April 2027. The draft legislation also makes clear that property treated as part of the estate under the new rule is not to be treated as business property relief or agricultural property relief. That is a subtle but meaningful point for business owners who might otherwise assume a pension connected to business planning could attract those reliefs. It will not.
Will Your Pension Be Subject to Inheritance Tax?
The UK government is closing a long-standing loophole. From 2027, most unused pension funds and death benefits will be dragged into the Inheritance Tax (IHT) net, fundamentally altering generational wealth planning.
The £120,000 Shock to the System
Historically, discretionary pensions sat outside your estate. By integrating them, families with combined assets exceeding the nil-rate bands face drastic tax increases. Let's examine a typical scenario: an estate with £600,000 in property/cash and a £300,000 unused pension pot.
Based only on the £600k estate outside the pension.
Pension wealth aggregated, pushing taxable estate to £900k.
Navigating the Scope
Not all pensions are treated equally under the new legislation. The reform primarily targets wealth accumulation vehicles while protecting active working benefits and established spousal protections.
In Scope (Taxable)
- ✖ Defined Contribution (DC) pots
- ✖ Flexi-access drawdown funds
- ✖ Uncrystallised funds
- ✖ Most lump sum death benefits
Out of Scope (Exempt)
- ✔ Death-in-service benefits (active employees)
- ✔ Dependants' scheme pensions (DB schemes)
- ✔ Assets passing to a legal spouse or civil partner
- ✔ Gifts to registered charities
The "Double Tax" Trap (Age 75+)
A common mistake is confusing IHT with Income Tax. If a member dies aged 75 or over, the inherited pension is subject to both.
While the IHT paid on the pension is deductible from the amount subject to Income Tax (to prevent an absolute wipeout), a beneficiary paying a 45% additional income tax rate could still see up to 67% of the gross pension wealth absorbed by HMRC.
Example: £100,000 Pension (Beneficiary at 45% Income Tax)
- £40,000 (IHT @ 40%)
- £27,000 (Income Tax on remaining £60k @ 45%)
= £33,000 Net to Beneficiary
Frozen Thresholds & The £2m Taper
The standard Nil-Rate Band (£325,000) and Residence Nil-Rate Band (£175,000) are frozen until 2030. Adding pension wealth to the estate calculation pushes many families over the critical £2 million threshold, where the valuable home allowance begins to aggressively disappear.
The Taper Mechanism
If your total estate (now including pensions) exceeds £2 million, you lose £1 of the Residence Nil-Rate Band for every £2 over the limit. By £2.35 million, the allowance is entirely wiped out, increasing the tax burden on the family home.
The Executor's Burden
Pension scheme administrators will not pay the tax independently. The burden shifts to the Personal Representatives (Executors), tightly connecting the probate estate and the pension element. Beneficiaries are jointly liable.
Notification
Personal Representatives (PRs) immediately notify the pension scheme of the member's passing.
Valuation
The pension scheme administrator must provide the PRs with the exact value of unused funds within 4 weeks.
Calculation
PRs use a new HMRC online calculator to properly apportion the nil-rate band across all estate assets.
Reporting & Payment
PRs report the pension value in the formal IHT400 account within 6 months. To manage liquidity, PRs can order the scheme to withhold 50% of the benefit to pay HMRC.
Why the change matters more when your estate is already close to the thresholds
The IHT nil-rate band remains £325,000. The residence nil-rate band remains £175,000 where available. Both thresholds have been fixed, and the current policy framework keeps them at these levels through to 2029–30. That matters because frozen thresholds make it easier for pension wealth to push an estate over the line even without any dramatic change in lifestyle or investment returns.
This is especially relevant for business owners, company directors, landlords, contractors and higher earners who have spent years building up pension assets while keeping other wealth outside the pension wrapper. A pension has often been the cleanest place to accumulate capital tax-efficiently, particularly for people with irregular income or retained profits from a company. The new rules do not stop that being sensible for retirement planning, but they do reduce the argument that a pension should automatically be the last pot of money to spend.
The government estimates that most estates will still have no IHT liability after 6 April 2027. Its own figures suggest that, out of around 213,000 estates with inheritable pension wealth in 2027–28, about 10,500 estates will become liable for IHT where they previously would not, and about 38,500 estates will pay more IHT than before. The average increase in IHT liability is estimated at around £34,000 where pension assets are included, although that figure is a static estimate and does not assume behavioural changes.
How the new reporting and payment process will work
One of the most practically important changes is who has to deal with the tax. After consultation, the government decided not to make pension scheme administrators primarily liable. Instead, personal representatives will be responsible for reporting and paying any IHT due on unused pension funds and death benefits from 6 April 2027. Pension beneficiaries will become jointly and severally liable for any IHT due from the point at which they are appointed.
That shift matters because it keeps the probate estate and the pension element more closely connected, which is how HMRC already handles some non-discretionary pension schemes and other assets that do not pass directly through the estate. It also avoids the administrative deadlock that would have arisen if pension scheme administrators had to make the tax payment independently, potentially before knowing the full estate position.
There is, however, a liquidity issue that families and executors will need to watch. If the personal representatives reasonably expect IHT to be due, they can direct pension scheme administrators to withhold 50% of the taxable benefits for up to 15 months from the date of death and then pay the IHT due to HMRC before releasing the balance to beneficiaries. That is a useful safeguard, but it also means beneficiaries may not receive the pension death benefit quickly if the estate is exposed to tax.
The government also expects pension schemes to make the liability position clear to non-exempt beneficiaries, such as adult children, and to explain how benefits can be accessed and how IHT can be paid. In addition, schemes will need to share the value of unused pension funds or death benefits with personal representatives within four weeks of being notified of the member’s death. For executors, that means pensions will become a much more active part of estate administration than they have been for many families in the past.
Will Your Pension Be Subject to Inheritance Tax from April 2027?
A plain-English, interactive explainer covering the Autumn Budget 2024 reform, the draft Finance Bill 2025–26 rules, what's in and out of scope, who pays, and how to plan ahead.
The headline change
For roughly the last 35 years, unused defined contribution (DC) pension pots — SIPPs, personal pensions and workplace DC schemes — have typically sat outside your estate for Inheritance Tax (IHT). That made pensions one of the most tax-efficient ways to pass wealth to the next generation.
At the Autumn Budget 2024, Chancellor Rachel Reeves announced that this is changing. From 6 April 2027, most unused pension funds and pension death benefits will be brought inside your estate for IHT purposes, under provisions in the draft Finance Bill 2025–26.
Why is the government doing this?
HMRC says pensions have been increasingly used — and marketed — as a tax-planning vehicle to transfer wealth, rather than to fund retirement. The reform is designed to remove that distortion and to align the IHT treatment of pensions with other types of assets. Most estates are still expected to pay no IHT at all after the change.
Key dates — past, present & future
In scope from April 2027
- Unused DC pension funds — SIPPs, personal pensions, workplace money-purchase pots
- Residual drawdown funds not yet fully used
- DB lump-sum death benefits
- Pension protection lump sums
- Certain death benefits for those no longer actively employed
Still outside scope / exempt
- Death-in-service benefits from a registered pension scheme
- Dependants' scheme pensions from DB or collective DC schemes
- Anything left to a surviving spouse or civil partner (spouse exemption)
- Anything left to a UK-registered charity
- Nominee/successor annuities (continuing income, not wealth transfer)
The "double tax" issue if you die over 75
Income-tax rules on inherited pensions are not changing. If you die at age 75 or over, beneficiaries already pay income tax at their marginal rate when they draw from the inherited pot. From April 2027, the same pot can also be hit by 40% IHT — before the income tax is applied.
Depending on the beneficiary's tax band, the combined effective tax rate on a pension inherited from someone who died over 75 can reach roughly 52% (basic rate), 64% (higher rate) or 67% (additional rate). HMRC has indicated it will address the pure overlap so the same pound isn't taxed twice, but the structure still bites.
Rough indicative calculator
Enter the value of your estate and pension to see how IHT might change before and after 6 April 2027. This is a simplified illustration — it does not account for lifetime gifts, trusts, the RNRB £2m taper, the 10% charity rate, or your specific circumstances.
What advisers are recommending
A Scottish Widows Investor Confidence Barometer found that 57% of advisers say clients remain uncertain about the changes. The most common strategies they report using are:
- Lifetime gifting strategies — roughly 55% of advisers recommend using annual exemptions, potentially exempt transfers and "normal expenditure out of income" where available.
- Earlier drawdown — around 49% are suggesting clients draw pension income sooner, especially where IHT exposure outweighs the tax-deferred growth benefit.
- Trusts and onshore bonds — around 37% are recommending alternative wrappers for wealth the client no longer intends to spend.
- ISAs and other tax-efficient wrappers — around 32% recommend rebalancing toward assets that can be gifted or used more flexibly.
- Family investment companies — used by roughly 18% for larger, multi-generational estates.
A checklist you can act on now
- Review and update your Expression of Wish / beneficiary nominations with every provider.
- Value your full estate including pensions — check whether you'd cross the £325k / £500k / £650k / £1m thresholds.
- Watch the £2m RNRB taper: including the pension may push an estate above £2m and start eroding the residence allowance.
- Consider the age-75 cliff edge for income tax on inherited pensions as part of your decumulation plan.
- Look at whole-of-life insurance written in trust to provide liquidity to pay any future IHT.
- Revisit your Will — coordinate it with pension nominations so the whole estate plan fits together.
Watch-outs
- Drawing down too fast can trigger 40% or 45% income tax and lose years of tax-free growth.
- Moving pension assets into a non-pension trust structure may be treated as a disposal — anti-avoidance rules apply.
- Nominating a spouse delays the tax but doesn't eliminate it — the bill may just land on the second death.
- Detailed rules are still being finalised — flexibility in any plan is valuable.
- Personal representatives carry new reporting duties — make their job easier with clear, up-to-date records.
Sources include GOV.UK (HMRC policy paper on IHT for unused pension funds and death benefits, 21 July 2025), the draft Finance Bill 2025–26, Royal London, Standard Life, Legal & General, Rathbones, Womble Bond Dickinson, The People's Pension, and the Scottish Widows Investor Confidence Barometer. This widget is an educational explainer, not personal financial, tax or legal advice. Thresholds, rules and estimates reflect the position as of April 2026 and are subject to parliamentary approval and further HMRC guidance. Speak to a qualified financial adviser about your own circumstances.
A simple worked example
Suppose a person dies in 2027 with a £600,000 estate outside the pension and a £300,000 unused pension pot. Ignore the residence nil-rate band and any spouse or charity exemption for the sake of illustration. Under the current rules, the pension might sit outside the estate if it is in a discretionary arrangement, so the IHT bill would be based only on the £600,000 estate: £275,000 above the £325,000 nil-rate band, taxed at 40%, which gives £110,000. From April 2027, if the pension is brought into scope, the taxable estate becomes £900,000, leaving £575,000 above the nil-rate band and an IHT bill of £230,000. In that example, the reform increases the tax bill by £120,000.
That is not a forecast for every household. A spouse or civil partner exemption can remove IHT entirely on assets passing to a surviving spouse or civil partner, and gifts to registered charities remain exempt. But the example shows why the change is material for families where pension wealth is no longer just retirement capital but part of the inheritance plan.
The common mistakes people are likely to make
The biggest mistake is assuming a pension nomination form alone decides the tax outcome. It does not. Nominations can guide trustees, but the tax treatment depends on the scheme rules, the type of benefit, the beneficiary and the law in force at death. The draft legislation is drafted around pension property that must or may be used for a relevant death benefit, which is much broader than a simple nomination exercise.
A second mistake is confusing IHT with income tax. Even where no IHT is due, beneficiaries may still have to pay income tax on inherited pension payments depending on the member’s age at death, the type of pension, and the timing of payment. That can be a real trap where families expect a tax-free lump sum and then discover that income tax is deducted because the benefit is paid late or because the deceased was 75 or over.
A third mistake is ignoring liquidity. If the free estate is small but the pension is large, the IHT charge could arise even though most of the value sits inside the pension. That creates an executor problem rather than just a tax problem, because HMRC still expects the tax to be paid and the estate may not have cash available unless the pension or other assets are accessible in time. The new withholding mechanism helps, but it is not a substitute for planning.
A fourth mistake is assuming every pension death benefit is now taxable. That is too broad. Death-in-service benefits from registered pension schemes are explicitly out of scope from April 2027, and spouse, civil partner and charity exemptions continue to apply. The practical challenge is not that every pension becomes taxed; it is that more pensions will now need to be considered in the IHT calculation than many families have historically expected.
What this means in practice before April 2027
The right question is not simply “Will my pension be taxed?” The better question is whether your total estate, including pension wealth, is likely to exceed the available IHT thresholds and who should ultimately benefit from the pension on death. For many people, the answer will still be that the pension is a sensible retirement vehicle. For others, especially those with large unused pots, complex family arrangements or a significant non-pension estate, the change makes their pension a less reliable shelter for inheritance planning than it has been in the past.
For company directors and business owners, this is a good moment to review whether pension savings, retained business value, property and cash holdings are pulling in different directions. If the pension is intended to be part of a wider family succession plan, the beneficiary structure, estate liquidity and spouse or charity exemptions all need to be considered together. The policy direction is clear: pensions are being pushed back towards retirement provision, not inheritance engineering.
Summary of key insights
The answer is yes, for most unused pension funds and death benefits, from 6 April 2027. The reform is real, but it is narrower than some headlines suggest: death-in-service cover remains outside IHT, and spouse, civil partner and charity exemptions still apply.
The practical effect will be felt most by estates that already sit near the £325,000 nil-rate band, especially where pension wealth has been left to grow for succession purposes. Frozen IHT thresholds make that more likely, not less.
Executors, beneficiaries and advisers will need to pay more attention to how pensions interact with the rest of the estate, because the new rules move the tax calculation from “pension or estate” towards “pension plus estate”. That is the change that will matter when the numbers are being worked out after death
FAQs
Q1: Could someone avoid inheritance tax by withdrawing their pension before death instead?
A1: Well, it’s worth noting that this can easily backfire. Once pension funds are withdrawn, they usually become part of the individual’s personal estate—fully exposed to inheritance tax. In practice, I’ve seen clients withdraw funds thinking they’re being clever, only to increase their taxable estate unnecessarily. The key is timing and purpose—drawing funds for genuine spending needs is fine, but doing it purely to “escape” IHT often achieves the opposite.
Q2: What happens if someone dies with multiple pension pots across different providers?
A2: In my experience, this creates more of an administrative headache than a tax advantage. Each pension provider will need to report values separately, but for IHT purposes, HMRC looks at the combined total. I’ve seen estates delayed simply because executors didn’t realise they needed valuations from every provider before submitting IHT forms.
Q3: Can someone still pass their pension tax-free to a spouse after the rule change?
A3: Yes—and this is a crucial point people often miss. Transfers to a spouse or civil partner remain exempt from inheritance tax. In practice, many married couples won’t feel the impact immediately because of this exemption. The planning challenge arises when the second partner dies and the combined estate is assessed.
Q4: Does putting a pension into a trust still protect it from inheritance tax?
A4: Not in the way it once did. Historically, the discretionary nature of pension schemes acted a bit like a trust wrapper. From April 2027, that distinction largely disappears. I’ve had clients assume a trust structure solves everything—it doesn’t anymore for pension assets.
Q5: Will small pension pots be ignored for inheritance tax purposes?
A5: No, there’s no special exemption just because a pot is “small.” However, in practical terms, many smaller estates will still fall below the nil-rate band, so no IHT arises anyway. It’s less about the size of the pension and more about the total estate value.
Q6: How will this affect someone with a SIPP (Self-Invested Personal Pension)?
A6: SIPPs are firmly in scope. I’ve seen many higher earners use SIPPs as long-term wealth vehicles, sometimes intentionally leaving them untouched. That strategy needs revisiting. The tax efficiency during lifetime remains, but the inheritance angle is no longer as favourable.
Q7: Could someone reduce inheritance tax by nominating a charity as pension beneficiary?
A7: Yes, and it’s often underused. Leaving pension benefits to a registered charity remains exempt from IHT. In some cases, this can also reduce the overall IHT rate on the rest of the estate if charitable giving thresholds are met. It’s a strategic lever worth considering.
Q8: What if someone dies shortly after retiring and starting drawdown?
A8: This is where things get nuanced. The remaining drawdown fund is still treated as unused pension wealth. I’ve seen cases where someone takes a small income but leaves the bulk invested—those remaining funds can still fall within IHT from 2027 onwards.
Q9: Will beneficiaries need to pay both inheritance tax and income tax on the same pension?
A9: Potentially, yes—and that’s one of the harsher outcomes. IHT may apply to the value of the pension, and then income tax can apply when beneficiaries draw funds. It’s a layered system, and I’ve had clients quite surprised by this “double exposure.”
Q10: Does the two-year rule for pension death benefits still matter?
A10: Absolutely. Even though the IHT treatment is changing, the two-year rule still affects income tax. If benefits aren’t paid within two years of the scheme being notified of death, tax advantages can be lost. Executors often overlook this during probate delays.
Q11: How does this affect business owners using pensions for succession planning?
A11: This is where the impact is most noticeable. Many directors used pensions as a way to extract profits tax-efficiently and pass wealth on. That strategy now needs rethinking. I’ve seen business owners shift focus back to share planning and family investment companies instead.
Q12: Can someone still prioritise pension contributions over ISA savings for inheritance planning?
A12: It’s no longer a clear-cut answer. Pensions still offer income tax relief and growth advantages, but ISAs remain outside IHT planning entirely. In practice, many clients are now balancing both rather than heavily favouring pensions as they once did.
Q13: What happens if the pension beneficiary lives abroad?
A13: The UK IHT position generally still applies to the deceased’s estate, including pension wealth. However, the beneficiary’s country may also tax the receipt. Cross-border cases can become complex quickly—I’ve seen double-tax scenarios without proper planning.
Q14: Could someone reduce exposure by gifting other assets instead of touching their pension?
A14: Yes, and this is becoming more common. Making lifetime gifts from non-pension assets can reduce the taxable estate over time. The key is surviving the seven-year period for those gifts to fall outside IHT. It’s often a more reliable strategy than relying on pension treatment alone.
Q15: Will this change affect public sector or defined benefit pensions?
A15: Generally less so. Many defined benefit schemes pay dependants’ pensions rather than large lump sums, and these are typically outside the new IHT scope. The real shift is felt in defined contribution arrangements where unused funds can accumulate.
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