For years, pensions have had an important advantage when passing money on. Many unused pension funds could be left to beneficiaries without being counted as part of the estate for Inheritance Tax (IHT).
That will change on 6 April 2027.
From then, most unused pension funds and pension death benefits will be included when an estate is valued for IHT. Some families could find themselves within the scope of the tax for the first time. Others who already expect an IHT bill may see it increase.
What is changing with pensions and Inheritance Tax in 2027?
Under the current rules, many pension death benefits paid at the discretion of pension scheme trustees sit outside the estate for inheritance tax (IHT) purposes.
For deaths on or after 6 April 2027, most unused pension funds and death benefits will be brought into the IHT calculation. HMRC refers to these assets as “notional pension property”.
The date of death determines which regime applies. Anyone who dies before 6 April 2027 remains subject to the existing IHT treatment, even if their beneficiaries receive the pension money after that date.
The change was first announced in the Autumn Budget 2024 and was subsequently legislated in the Finance Act 2026. HMRC provided further details in August 2026 in its Inheritance Tax on Pensions: Technical Note 2.
Will everyone with a pension pay more Inheritance Tax?
A pension being included in an estate does not automatically create an IHT bill. The value of the whole estate and the allowances or exemptions available determine whether tax is due.
The standard nil-rate band is currently £325,000. A residence nil-rate band of up to £175,000 may also apply when a qualifying home passes to direct descendants, subject to the relevant conditions. Transfers between spouses or civil partners are generally exempt from IHT.
HMRC estimates that around 213,000 estates will contain inheritable pension wealth in 2027/28. Around 10,500 are expected to become liable for IHT because of the reform, while approximately 38,500 are expected to pay more than under the current system.
For many households, the change will have no effect on the amount of IHT due. It becomes more significant where unused pension savings take an estate towards or beyond the available allowances.
Which pension benefits are affected?
Most unused funds in registered pension schemes and many pension death benefits will fall within the new regime.
There are exceptions. Death in service benefits from registered pension schemes remain outside the new treatment. Certain dependant’s scheme pensions from defined benefit and collective money purchase arrangements are also excluded.
The type of pension you hold matters. A defined contribution pension can provide different benefits after death from those available through a defined benefit scheme.
People often accumulate pensions from several employers or providers over the course of their working lives. Knowing what you hold, how each scheme deals with death benefits and who you have nominated to receive them is a useful starting point. Our pension and retirement planning service explains how we approach pensions as part of a wider retirement plan.
What happens if your spouse, civil partner or children inherit your pension?
The existing exemption for spouses and civil partners remains in place. Qualifying pension benefits that pass to a surviving spouse or civil partner continue to be exempt from IHT.
The position is different where pension wealth passes to children or other non-exempt beneficiaries. From April 2027, those funds may form part of the taxable value of the deceased’s estate. Whether any IHT is actually payable will depend on the size of the estate as a whole and the allowances available.
Couples with significant assets should also consider the position after the first death. Wealth inherited by a surviving spouse or civil partner can later form part of that person’s own estate.
As a result, the intended destination of pension benefits has become a more important consideration in estate planning than it has been for many families under the current rules.
Could beneficiaries pay Income Tax as well as Inheritance Tax?
Inherited pensions have separate Income Tax rules, and these continue alongside the new IHT treatment.
Under current rules, the pension holder’s age at death can affect how benefits are taxed. If someone dies before 75, qualifying pension death benefits can often be received without Income Tax, subject to the relevant conditions and allowances. Following death at 75 or over, taxable pension benefits are generally subject to Income Tax when withdrawn by the beneficiary.
The interaction between the two taxes can become complicated, particularly where a pension forms a sizeable part of an estate. HMRC has said that further guidance will be provided ahead of implementation.
Who is responsible for paying Inheritance Tax on pension benefits?
The personal representatives administering the estate will be responsible for reporting and paying any IHT due. They’ll need information from pension scheme administrators about any funds that fall within the new treatment.
There will also be a mechanism allowing tax attributable to pension benefits to be paid from those benefits in certain circumstances. This could be important where an estate contains a valuable pension but relatively little accessible cash. HMRC is continuing to develop this administrative process ahead of April 2027, so executors and pension beneficiaries should expect more detailed guidance before the rules take effect.
Should you withdraw pension money before April 2027?
Withdrawing pension savings simply because the IHT treatment is changing could create other tax consequences.
Pension withdrawals are generally subject to Income Tax, and anything left unspent afterwards could still form part of the estate for IHT. A large withdrawal therefore risks creating an immediate tax charge without solving the longer-term estate-planning issue.
There is also the purpose of the pension itself to consider. Money that was set aside to provide an income throughout retirement needs to last, and future spending needs can be hard to predict decades in advance.
Some retirement strategies have been based on spending savings or investments outside the pension first, while preserving pension funds for beneficiaries because of their favourable IHT treatment. Those strategies deserve another look before April 2027.
Our guide to confident financial planning explains why decisions about pensions make more sense when considered within the wider financial picture.
What should you review before April 2027?
Start with an up-to-date estimate of your estate that includes pension funds expected to fall within the new rules. Previous calculations that treated those pensions as outside the estate may give a very different result.
Check your pension beneficiary nominations as well. An expression of wish tells the pension scheme who you would like to receive your benefits after death. It is particularly worth checking after a marriage, divorce, bereavement or other significant change in family circumstances.
Your Will and pension nomination perform different functions, so changing one does not automatically update the other.
Existing retirement plans may also need attention if they were built around preserving pension wealth for beneficiaries, on the assumption that those savings would stay outside the estate. For many families that assumption still holds and the plan needs no change. It matters most where unused pension savings would otherwise take the estate close to or above the available allowances, or where the strategy relied on passing pension wealth between generations rather than spending it — in those cases, the figures behind the plan are worth running again.
There is still time before April 2027 to understand the effect of the change and make considered decisions rather than reacting to the deadline.
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Important Information
This article is for general information purposes only and does not constitute financial advice. All figures are based on publicly available data as at September 2026. Mortgage rates, economic forecasts and base rate predictions are subject to change and may differ from actual outcomes. The rate available to you will depend on your personal circumstances, loan-to-value and lender criteria. Your home may be repossessed if you do not keep up repayments on your mortgage. Always seek advice from a qualified, FCA-regulated mortgage adviser before making any decision. True Advice Financial Services is authorised and regulated by the Financial Conduct Authority.
He holds a CeMAP qualification and has been advising since 2018, continually updating his expertise through ongoing training. Ashley's client-focused approach ensures personalized, effective advice, fostering long-term relationships. Outside of work, he enjoys playing football and exploring new countries. For personalized financial advice, Ashley is dedicated to helping clients achieve their goals.
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