From 6 April 2027, most unused pension funds will count towards your estate for inheritance tax. For many families it's a significant change to how they should plan. Here's what's changing, who is most affected, and the steps worth considering now.
- From 6 April 2027, most unused pensions and pension death benefits will be included in your estate for inheritance tax (IHT).
- Pensions left to a spouse or civil partner will normally still be free of IHT, and death-in-service benefits are excluded.
- If you die after age 75, your beneficiaries may pay income tax on what they draw as well, although not on the part of the pension used to pay IHT.
- Your executors, not your pension provider, will be responsible for reporting and paying the tax.
- The IHT allowances are frozen until April 2031, so more estates will be caught.
What's changing?
For years, pensions have been one of the most tax-efficient ways to pass on wealth. Most defined contribution pensions, such as personal pensions, SIPPs and workplace pensions, sit outside your estate for inheritance tax. That's why many people have been advised to spend their other savings first and leave their pension untouched for the next generation.
That changes for deaths on or after 6 April 2027. The new rules were confirmed in the Finance Act 2026, which became law on 18 March 2026. From that date, most unused pension funds and death benefits will be added to the value of your estate and taxed at 40% on anything above your available allowances.
It's the date of death that counts. If someone dies before 6 April 2027, the current rules apply, even if the pension is paid out after that date.
What's included, and what isn't
The new rules apply to most pensions that haven't been used to buy a guaranteed income for you by the time you die. A few important benefits are left out.
Included in your estate
- Unused funds in personal pensions, SIPPs and defined contribution workplace pensions
- Money left in drawdown
- Lump sums paid out on your death from these pensions
- Remaining payments under an annuity guarantee period, and annuity value protection lump sums
Not included
- Pensions left to your spouse or civil partner
- Death-in-service benefits from an employer's scheme
- Dependants' pensions paid from a defined benefit (final salary) scheme
- Joint life annuities, where the income continues to your partner
- Lump sums left to charity
The allowances, and why more families will be affected
Everyone has a nil-rate band of £325,000. If your home passes to your children or grandchildren, you may also have a residence nil-rate band of up to £175,000. Any unused allowances can pass to a surviving spouse or civil partner, so a married couple can leave up to £1 million free of IHT.
Both allowances are frozen until April 2031, and they haven't gone up since 2009 and 2020. As house prices and pension values rise, more estates will go over them.
There's a second, less obvious effect. The residence nil-rate band is reduced by £1 for every £2 your estate is worth over £2 million. Because your pension will count towards that £2 million, some estates that are comfortably below it today will lose some or all of this allowance after April 2027.
Death after 75: the risk of paying tax twice
Income tax on inherited pensions isn't changing. What matters is your age when you die.
- Before 75: your beneficiaries can usually take the pension free of income tax. Lump sums are tax-free up to the lump sum and death benefit allowance, normally £1,073,100. IHT may still apply.
- After 75: your beneficiaries pay income tax at their own rate on anything they take out, on top of any IHT.
The government has confirmed that income tax won't be charged on the part of the pension used to pay IHT. Even so, the combined bill can be large. If IHT is paid at 40% and the beneficiary pays 45% income tax on the rest, 67% of the pension goes in tax, and in some cases it can be more.
Margaret's home is worth £400,000, she has £300,000 in savings and investments and £500,000 in a SIPP. She has her late husband's unused allowances, so her estate can pass on £1 million free of IHT.
| Now | From April 2027 | |
|---|---|---|
| Estate for IHT | £700,000 | £1,200,000 |
| Allowances | £1,000,000 | £1,000,000 |
| Inheritance tax | £0 | £80,000 |
The SIPP's share of the IHT bill is about £33,333. The remaining £466,667 would be taxed as income when her children draw it. If they pay 40% income tax on it, that's around £186,667 more. Of the £500,000 pension, the children would receive about £280,000 – an overall tax rate of 44%.
This is a simplified example for illustration only. It assumes the IHT is shared across the estate in proportion to value and that the children pay 40% income tax on all withdrawals.
How the tax will be paid
Your executors (called personal representatives in England and Wales) will be responsible for reporting and paying any IHT due on your pensions, as they are for the rest of your estate. In practice, that means they will need to:
- Find all your pensions and ask each provider for its value. Providers normally have 28 days to reply.
- Work out the IHT on the whole estate, including the pensions, and how it's shared between them.
- Pay the tax by the end of the sixth month after the month of death, after which HMRC charges interest.
To help with this, executors can ask a pension provider to hold back up to 50% of the benefits for up to 15 months. Beneficiaries can also ask the provider to pay IHT of £1,000 or more directly to HMRC from the pension, which the provider must do within 35 days. Beneficiaries can become jointly liable for the tax once they receive the benefits.
A simple thing that helps: keep an up-to-date list of all your pensions, with the provider, policy number and who you've nominated. It will save your executors a great deal of time.
Who is most affected?
You're more likely to be affected if:
- you're single, divorced or widowed and plan to leave your pension to your children
- your pension is a large part of your wealth, often because you've been living on other savings to keep it intact
- your estate, including your pension, is worth more than £2 million
- you're over 75, or expect to be, so your beneficiaries would also pay income tax
If your pension will pass to your spouse or civil partner, there's normally no IHT on the first death. The pension will then be part of their estate when they die, so it's still worth planning as a couple.
What you can do now
There's no single right answer, and some of the old rules of thumb no longer apply. These are the areas we're reviewing with clients:
Check your nominations
Make sure your expression of wishes is up to date for every pension. Who you nominate affects both IHT and income tax, especially if you're married.
Rethink the order you spend your money
Leaving your pension untouched until last may no longer make sense. Drawing more from it during your lifetime could reduce your estate, but it needs balancing against the income tax you'd pay now.
Consider gifting
You can give away £3,000 a year free of IHT, and regular gifts from surplus income can be exempt straight away if you keep good records. Larger gifts usually fall outside your estate after seven years.
Use life cover written in trust
A whole of life policy written in trust can pay out a lump sum to cover the IHT bill, without adding to your estate. Find out more about life cover.
Review your will
Pensions do not normally pass under your will, but as they become subject to Inheritance Tax, your will should be reviewed as part of your wider estate planning.
Don't rush
Taking large sums out of your pension can push you into a higher tax band, and money taken out of a pension is part of your estate unless you spend it or give it away. Plan first, then act.
How we can help
We can look at your pensions, investments and wider estate together, show you how the April 2027 changes affect your family, and use cashflow planning to work out how much you can comfortably afford to spend or give away. From there, we'll recommend the steps that make sense for you.
Find out more about our estate planning and pension review services, or book a free consultation.
Common questions
When do the new pension inheritance tax rules start?
They apply to deaths on or after 6 April 2027. If someone dies before then, the current rules apply, even if the pension is paid out after that date.
Will my spouse pay inheritance tax on my pension?
No. Pensions left to a spouse or civil partner will normally remain free of inheritance tax. However, whatever is left will form part of their estate when they die.
Is death-in-service cover affected?
No. Death-in-service benefits from an employer's pension scheme are excluded from the new rules.
Does this affect final salary pensions?
Dependants' pensions paid from a defined benefit (final salary) scheme are excluded. Some lump sums paid from these schemes on death may be included.
Who pays the inheritance tax on my pension?
Your executors are responsible for reporting and paying it. Your beneficiaries can ask the pension provider to pay tax of £1,000 or more directly to HMRC from the pension.
Should I take money out of my pension now to avoid inheritance tax?
Not necessarily. Withdrawals can be taxed as income, and money taken out stays in your estate unless you spend it or give it away. It's worth getting advice on your whole position before making any changes.
This article is for general information only and does not constitute advice. It reflects our understanding of legislation and HMRC guidance as at September 2026, and tax rules can change. The tax treatment depends on your individual circumstances. The Financial Conduct Authority does not regulate tax advice, estate planning, will writing or trusts. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.
Worried about inheritance tax on your pension?
We'll show you how the April 2027 changes affect your family and what you can do about it. Your first meeting is free, with no obligation.
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