Pension and Inheritance Tax: What the 2027 Changes Mean for Your Estate
From 6 April 2027, most unused pension funds will be brought within the scope of inheritance tax (IHT) for the first time. The legislation has now received Royal Assent as part of the Finance Act...
From 6 April 2027, most unused pension funds will be brought within the scope of inheritance tax (IHT) for the first time. The legislation has now received Royal Assent as part of the Finance Act 2026*, so this is no longer a proposal under discussion. It is a confirmed change that will reshape how pension savings are treated on death, and the government estimates it will bring around 10,500 additional estates into the IHT net each year**.
If your retirement and estate plans have relied on pension wealth sitting outside your taxable estate, this guide sets out what is changing, who is likely to be affected, and what you may wish to review before the rules come into force.
Why the government made this change
At the 2024 Autumn Budget, the government announced plans to end the long standing exemption that has allowed unused pension funds to pass to beneficiaries free of inheritance tax. The stated aim was to remove pensions as a tax planning vehicle for passing on wealth, rather than a means of funding retirement. A technical consultation followed, along with draft legislation and a formal consultation response, before the measure was confirmed in the Finance Bill and later signed into law.
Historically, defined contribution pension pots, sometimes described as money purchase pensions, have sat outside a person’s estate for inheritance tax purposes. This made them one of the most tax efficient ways to transfer wealth to the next generation, and it encouraged many people to draw down other assets first while leaving their pension largely untouched. From April 2027, that advantage is removed for most pension scheme members.
What counts as an unused pension fund
The changes apply to most unused pension funds and pension death benefits, meaning money that remains in a pension at the point of the pension scheme member’s death rather than having been drawn out during their lifetime. Specifically, this includes:
- Personal and workplace defined contribution pension funds that have not been fully accessed
- Inherited pension funds that remain in drawdown
- Most lump sum death benefits paid from a registered pension scheme
Defined benefit pensions, such as final salary schemes, are broadly unaffected, since they do not typically leave unused pension assets behind on death.
What remains exempt
Not every pension component and not every beneficiary will be affected in the same way. Several categories remain outside the scope of the new inheritance tax rules:
- Death in service benefits. Lump sums paid from a registered pension scheme following death in service remain exempt.
- Dependants’ scheme pensions. These, along with most defined benefit death benefits, are not brought into scope.
- Transfers to a surviving spouse or civil partner. Pension funds and death benefits left to a spouse or civil partner remain free of inheritance tax, in the same way that other assets left to a spouse or civil partner already are. This applies where the surviving spouse or civil partner is a long term UK resident.
- Transfers to a registered charity. Pension funds left to a charity remain exempt.
Anyone who does not fall into one of these categories is generally treated as a non-exempt beneficiary, meaning the pension funds they receive will count towards the deceased’s taxable estate.
How the tax will be calculated
Inheritance tax is payable where the value of a taxable estate exceeds the available nil-rate band, currently £325,000***, plus the residence nil-rate band of £175,000 where that applies. Above these thresholds, tax is charged at 40% on the excess. From April 2027, the value of most unused pension funds and death benefits will be added into that calculation, alongside property, savings, investments and other assets.
For some estates, this will make little practical difference, particularly where total wealth remains within the available allowances. For others, especially those with substantial pension savings on top of other assets, it could mean a meaningful inheritance tax liability where none existed before.
For those who die at 75 or over, the way income tax and inheritance tax interact on an inherited pension can be complex, and it is an area where taking personal advice is particularly worthwhile.
Who is responsible for reporting and paying the tax
One of the more significant practical changes is who becomes responsible for handling inheritance tax on pensions. Under the new rules, this responsibility sits with the deceased’s personal representatives, rather than with the pension scheme administrator alone.
Personal representatives will need to:
- Contact each pension scheme the deceased held to obtain a valuation of unused pension funds, which scheme administrators must generally provide within four weeks of being notified of the death
- Establish the total value of the taxable estate, including pension assets, to determine whether inheritance tax is due
- Report and pay any inheritance tax owed, normally within six months of the date of death, after which interest begins to accrue on unpaid amounts
To help manage this process, personal representatives will be able to issue a withholding notice to a pension scheme administrator, instructing them to retain up to 50% of a beneficiary’s entitlement for up to 15 months after the end of the month of death. This is designed to prevent funds being paid out before the inheritance tax position is resolved, and it is intended for situations where a liability is genuinely anticipated rather than as a routine step in every estate.
A related mechanism, sometimes referred to as a direct payment scheme, allows personal representatives or beneficiaries to instruct scheme administrators to pay inheritance tax directly to HM Revenue and Customs (HMRC) from the pension fund itself, rather than requiring the estate to find the funds elsewhere. Pension scheme administrators and scheme trustees can become jointly and severally liable alongside personal representatives and beneficiaries if they fail to act on a valid withholding notice or payment request, so this is an area where cooperation between all parties matters.
Why this changes the planning conversation
For many people, the working assumption has been to preserve pension wealth for as long as possible and draw on other savings first, both for income tax efficiency during life and for the inheritance tax advantage on death. That second advantage no longer applies in the same way from April 2027.
Holding a large, unused pension pot could now increase the inheritance tax exposure of an estate rather than reduce it. This may prompt a rethink of the order in which different assets are drawn down in retirement, how much is left unspent in a pension, and how lifetime gifting fits into the wider picture. Strategies such as making regular gifts as part of your normal expenditure out of income, which can fall outside the estate immediately rather than being subject to the usual seven year rule, provided the gifts are regular and made from surplus income without affecting your standard of living, may become more relevant as part of a broader approach to reducing a taxable estate over time.
It is worth being clear about what has not changed. The ability to take a tax free pension commencement lump sum, generally up to 25% of pension benefits within existing limits, remains in place. The income tax relief available on pension contributions, and the tax efficient growth pension savings enjoy during your lifetime, are also unaffected. This is a change to how unused pension wealth is treated on death, not to how pensions work while you are alive.
Who is most likely to be affected
Not every estate will see a change in its inheritance tax position. People most likely to be affected include:
- Those with substantial defined contribution pension funds, particularly alongside property and other investments
- Those who have deliberately preserved pension wealth as an inheritance planning tool while living off other assets
- Estates already close to or above the nil-rate band and residence nil-rate band before pension wealth is included
- Those planning to leave pension benefits to non-exempt beneficiaries, such as children, rather than a spouse or civil partner
Areas worth reviewing
These are general points to consider and discuss with a qualified adviser. They are not personal recommendations.
Your drawdown strategy. If your approach has been to preserve pension savings and spend other assets first, it may be worth revisiting the order in which you access different pots.
Your expression of wishes. Pension nomination forms remain an important way to indicate who you would like to receive your pension death benefits, even though scheme trustees retain some discretion over final decisions.
Your estate as a whole. Pension assets can no longer be planned in isolation. A coordinated view of pensions, property, investments and other assets gives a clearer picture of your likely inheritance tax liability under the new rules.
Your personal representatives. Given the new reporting duties and deadlines involved, choosing personal representatives who are willing and able to manage this process, or seeking professional support for them, is worth considering as part of your will.
Starting early. With legislation now confirmed, there is no benefit to waiting. Reviewing your pension arrangements, will and wider estate plan now gives you more options than leaving it until closer to April 2027.
How we can help
These changes bring together pension planning, income tax and inheritance tax in a way that few estates have had to consider before. That is exactly where a coordinated approach adds the most value.
Our Pension Advice service can help you understand how the 2027 changes affect your specific pension arrangements and whether adjusting your withdrawal strategy is right for your circumstances.
If you hold pension savings across several schemes, our Pension Consolidation service can bring these together, making it easier to see your total pension wealth and plan around it as part of your wider estate.
For the bigger picture, our Legacy Planning service looks at pensions, property and other assets together, helping you understand your likely inheritance tax position and the options available to manage it, including how your pension benefits, nominations and wider succession plans work together.
The bottom line
The move to bring unused pension funds into the inheritance tax net from April 2027 is a fundamental shift in how retirement and estate planning fit together. Estates that would previously have passed pension wealth on free of inheritance tax may now face a liability, and personal representatives will take on new reporting and payment responsibilities that did not exist before. With the legislation now finalised, this is the moment to review how your pension savings, nominations and wider estate plan work together, well ahead of the deadline.
This article is for general information only and does not constitute financial, tax or legal advice. Everyone’s circumstances are different, and you should seek personalised advice before making decisions about your pension or estate.
*https://www.legislation.gov.uk/ukpga/2026/11
*** https://www.gov.uk/inheritance-tax
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