How the 2027 Inheritance Tax changes affect your pension

What’s changing in April 2027?

Most personal and workplace pensions are held in ‘discretionary trust arrangements’.

This means that the scheme’s trustees have the final say over who inherits your pension on your death.

In this structure, HMRC doesn’t treat those funds as yours. So, in 2026/27, there’s no IHT on pensions of this kind.

However, from 6 April 2027, that’ll change. Most unused pension funds and lump sum death benefits will be added to the value of your estate.

After being announced at the 2024 Autumn Budget, this change became law in March 2026. 

So, if you die on or after 6 April 2027, any unused pension funds you hold could become subject to IHT at 40%.

That would include pension savings you have in drawdown, or that you haven’t accessed yet (from 55, rising to 57 from 2028).

If you’ve drawn and spent your entire pension already, those funds won’t be taxable. Likewise, if you’ve bought an annuity - a type of insurance product you can buy with your pension savings that pays you a guaranteed income - you usually won’t pay IHT on that value. Some annuity death benefits may be in scope, depending on the product.

However, you may have funds you’ve drawn from your pension or received from your annuity but not yet spent. If you’re holding this in cash, it would contribute to your estate and could face IHT.

A quick recap of how Inheritance Tax works

As standard, IHT is charged at 40% on the value of your estate above certain thresholds. Here’s how it works in 2026/27.

• The first £325,000 of your estate can be inherited with no IHT applied - that’s your ‘nil-rate band’.
• Your beneficiaries may also benefit from the residence nil-rate band (£175,000) if you leave your main residence to direct descendants, such as children and grandchildren. Note that the residence nil-rate band tapers for estates worth £2 million or more.
• Your spouse or civil partner can inherit your entire estate tax-free. They can also inherit your unused nil-rate bands. In 2026/27, that’s the standard £325,000 nil-rate band, plus the £175,000 residence nil-rate band on a main residence - an additional £500,000 tax-free threshold. Combined with your own nil-rate bands of up to £500,000, that allows you to potentially leave up to £1 million IHT-free between you.
• Gifts to registered charities are also exempt. Plus, if you leave at least 10% of your estate to charity, you may benefit from a reduced IHT rate of 36%.

The nil-rate bands are also frozen until 2030. So, as asset, pension, and property values rise, more estates are likely to be pulled into the IHT net over time.

Will my pension be taxed when I die?

It’s unlikely that your pension will be subject to IHT. That’s because very few estates actually pay it - in the 2022/23 tax year, just 4.62% of UK deaths resulted in an IHT charge.

However, frozen thresholds and pensions being brought into the net could change that.

Government figures suggest that there’ll be roughly 213,000 estates with inheritable pension wealth in 2027/28. Of these, 10,500 will face an IHT bill where they previously wouldn’t.

You’re also more likely to see IHT on your pension if your total estate exceeds the thresholds. Plus, if you leave your estate to someone other than a spouse or civil partner.

But, if you’re already below the thresholds and don’t have significant pension wealth, you’re unlikely to be affected.

The ‘double tax’ trap: Inheritance Tax and Income Tax

This change also means that your beneficiaries may have to pay double tax when inheriting your pension.

Your beneficiaries will pay Income Tax at their marginal rate when drawing from your pension if you’re 75 or over when you die. If you die before age 75, there’s no Income Tax charge.

However, they could now face Income Tax and IHT. Depending on your beneficiaries’ tax rate, this could land them with a significant charge on your pension.

Higher and additional rate taxpayers could face charges of 64% and 67% respectively. In extreme cases, the charge could even exceed 90%.

It’s also worth being aware of the lump sum and death benefit allowance (LSDBA). This is the limit on the total tax-free lump sums you can receive in your lifetime or pay to your beneficiaries upon your death.

In 2026/27, the standard LSDBA is £1,073,100, and it applies across your total pension savings across all pots. 

Lump sums exceeding the LSDBA are usually taxed at your marginal rate. So, if you leave significant pension savings, your beneficiaries could have to pay a further tax charge if any lump sums exceed the LSDBA.

What’s exempt from the new rules?

Not all pensions are caught in the new rules. And, some previous exemptions still apply. Here’s a breakdown.

• Anything left to a spouse or civil partner - you can pass your entire estate, including pensions, to your spouse or civil partner free from IHT.
• Gifts to registered charities - charitable gifts remain exempt from IHT. That includes gifts made from your pension.
• Death-in-service benefits - where these are payable from a registered pension scheme, they remain exempt.
• Defined benefit pensions - also known as ‘final salary’ pensions, these schemes pay an income, usually for life. While they might continue paying this (or a reduced rate) to a spouse or civil partner, you can’t usually pass them on as a fund. As a result, there’s usually no IHT, although your spouse or civil partner will pay Income Tax at their marginal rate. Lump sum death benefits from these schemes may also be in scope. This may depend on the pension scheme and its specific rules. Check with your provider before making any decisions.

Example: how the new rules could work

This example helps show how the new rules could affect you.

Margaret, a 78-year-old widow, dies in July 2027. She leaves everything to her two adult children. 

When she passes away, she has the following assets:

• Main residence: £500,000
• ISAs and savings: £100,000
• Unused pension savings: £400,000
• Total estate: £1.1 million

Neither Margaret nor her late husband did any other IHT planning.

The table below shows how IHT would’ve worked if she had died before 6 April 2027, and how it’ll work as she died after.

This change creates a £40,000 IHT charge for Margaret’s children when they inherit her estate.

In both cases, as Margaret was over 75 when she died, they’d also face Income Tax at their marginal rate when accessing her unused pension funds.

Please note: this is an example. Your personal tax arrangements may differ and you could pay more or less tax depending on your circumstances.

Who pays the tax, and when?

Your personal representatives (PRs) are responsible for administering your estate on your death. 

That might be the executors you’ve named in your will. Or, if you die without a will - known as dying ‘intestate’ - that’ll be the person who’s most ‘entitled’ to your wealth. They’ll have to apply to become your estate’s administrator.

Your PRs are responsible for reporting and paying an IHT charge, not your pension scheme’s administrators. They can start collating this information and working out the IHT valuation as soon as you pass away - they don’t need to wait for probate to start that part of the process. 

Of course, your pension balance could be quite high. And usually, executors must settle the IHT bill before they can access the value of the estate.

To account for this, PRs can issue a withholding notice. This tells the pension scheme to hold back up to 50% of taxable pension benefits. That 50% counts per beneficiary, unless beneficiaries aren’t yet known. In that case, it applies to the whole pot. They can do this for up to 15 months while the tax position’s settled. 

They can also ask the pension scheme to pay an IHT bill directly to HMRC ahead of releasing the funds to your chosen beneficiaries. The IHT charge must be a minimum of £1,000 for this to happen, and requires PRs to submit a valid payment notice to the scheme administrators. The scheme must then pay the charge within 35 days.

Either of these steps may slow down how quickly families receive pension money after a death. But, it can make settling a charge more manageable.

What can I do now? Pension estate planning for 2027

Naturally, you’ll want your loved ones to keep hold of as much of your wealth as possible on your death. So, you may already be thinking about your options for limiting the impact of this change.

Here are a few things you could do.

• Review your pension beneficiaries - ensure your chosen pension beneficiaries are up to date and reflect what you’d like to happen when you die.
• Look at your whole estate together - rather than seeing your pension as separate, make decisions with your pensions, property, savings, and investments altogether.
• Reconsider the order you spend wealth - while you might have planned to spend everything else first and keep your pension until last, this strategy may no longer be the most tax-efficient. Drawing on your pension during retirement (from 55, rising to 57 from 2028) could reduce the size of your estate when you die.
• Remember the spousal and charity exemptions - transfers to a spouse or civil partner and gifts to charity remain exempt, so they could form a key part of your plan.
• Consider gifting during your lifetime - gifting within the tax-efficient rules and allowances can reduce the size of your estate over time, limiting a bill on your other assets.
• Think about life insurance written in trust - while this won’t reduce an IHT charge, it can give your beneficiaries funds that fall outside your estate to cover a bill.

Before you do anything, it’s important not to act rashly and make an irreversible decision that you later regret.

If you’re unsure what to do, speak to an Independent Financial Adviser (IFA). 

The pensions and Inheritance Tax timeline: key dates at a glance

• 30 October 2024 - in the Autumn Budget, Chancellor Rachel Reeves announces that pensions will be subject to IHT from April 2027.
• 21 July 2025 - the government publishes draft legislation and a response to an industry consultation.
• Autumn 2025 - the government confirms further refinements, including direct-payment options.
• 18 March 2026 - the Finance Bill receives Royal Assent (Finance Act 2026), legally confirming the rules.
• 6 April 2027 - the new rules take effect, meaning pensions are included in estates for IHT purposes for deaths on or after this date.

Frequently asked questions

Are all pensions affected?

No. Defined benefit (final salary) pensions and scheme pensions are generally unaffected because they usually can’t be passed on as a fund. The change mainly hits unused defined contribution pots and lump sum death benefits.

Will my husband or wife pay Inheritance Tax on my pension?

No. Anything left to a spouse or civil partner remains exempt from Inheritance Tax, just as it is today.

Is death-in-service cover caught?

No. Death-in-service benefits from a registered pension scheme are specifically excluded.

Does this affect me if I’ve already taken my pension as income or an annuity?

If you’ve taken your whole pension or used it to buy an annuity, there may be no ‘unused fund’ left to tax. However, if you have leftover funds in your pension, or in a savings account that were previously in your pension, they may be taxable. Some annuity death benefits may also be in scope, although it depends on the product.

Should I take all my pension out before 2027 to avoid the tax?

Not necessarily, and possibly not at all. Once you can access your pension (from 55, rising to 57 from 2028), taking a large sum can trigger a significant Income Tax bill now. Plus, you’ll have to hold your withdrawn savings somewhere that’ll probably count towards your taxable estate. This is where speaking to a qualified Independent Financial Adviser (IFA) can help.

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Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Please note that tax rules change regularly, and the actual tax benefits you receive will depend on your individual circumstances. If you’re not sure, please seek professional advice.