Pensions and inheritance tax from April 2027

From 6 April 2027 most unused pension funds and death benefits are included in your estate for inheritance tax. For many estates nothing changes, because the nil-rate bands or the spouse exemption cover it. For larger estates it removes the main reason to spend pensions last, and it makes the order you draw your money in a real decision.

Figures for the 2026/27 tax year · Published 2 October 2026 · Updated 12 October 2026

Since 2015, a defined contribution pension has been the most inheritance-tax-friendly thing most people own: outside the estate, and income-tax-free to the beneficiary if you died before 75. The Autumn Budget of October 2024 announced that from 6 April 2027 unused pension funds and most death benefits will be brought into the estate. That is now law: the Finance Act 2026 received Royal Assent on 18 March 2026, and it applies to deaths on or after 6 April 2027. This is what it means, without the panic.

What is changing

• Now: most pension pots and lump-sum death benefits are paid at the scheme’s discretion and are not part of your estate for IHT. Beneficiaries pay income tax on what they draw only if you died at 75 or over.
• From 6 April 2027: the value of unused pension funds and most death benefits is added to the estate when working out IHT. Death-in-service benefits, dependants’ scheme pensions and lump sums left to charity stay outside. The income-tax rules for beneficiaries continue, so a pot inherited from someone who died at 75 or over can face IHT and then income tax on withdrawals.
• Spouses and civil partners: anything left to a spouse or civil partner is still exempt. The change bites on the second death, or when a pension goes to children or others.

Who pays: your personal representatives (usually your executors) report the pensions alongside the rest of the estate and pay the IHT due on them. While they work out whether any is due, they can ask a pension scheme to hold back up to half of the death benefits for up to 15 months. HMRC’s detailed guidance is still being published, so check the latest position with the scheme or an adviser when the time comes.

The numbers

Inheritance tax is 40% on what an estate is worth above the allowances: a £325,000 nil-rate band, plus a £175,000 residence nil-rate band if you leave your home to direct descendants, and both can pass unused to a surviving spouse. So a couple leaving a home to children can have £1 million before IHT applies. The residence band tapers away for estates over £2 million, and from April 2027 pensions count towards that £2 million too.

A worked example. Pat and Chris, married, own a £450,000 home, hold £150,000 in ISAs and savings, and between them have £600,000 in pension pots. Today their taxable estate is £600,000, well inside the £1 million of combined allowances: no IHT. From April 2027 the pensions count, so the estate on the second death is £1.2 million. £200,000 is over the allowances, giving an IHT bill of about £80,000. If the pensions pass to children who are basic-rate taxpayers and Pat and Chris both died after 75, income tax on withdrawals comes on top.

What it changes about drawing your money

The old rule of thumb, “spend ISAs and savings first, leave the pension alone because it’s outside the estate”, stops being automatically right. From 2027, for an estate over the allowances, every £100 left in a pension could lose £40 to IHT and then income tax. Drawing the pension and spending it, or gifting it, can be better. But drawing more than you need creates an income tax bill now, and a gift only drops out of the estate after seven years. It is a trade-off to calculate, not a rule to follow.

Questions worth working through before April 2027

• Will your estate actually exceed the allowances? Add the house, savings, investments, pensions and any life cover not in trust. Many estates still won’t.
• Who are your nominated beneficiaries? Pension nominations are separate from your will. Check every scheme; an old nomination to an ex-partner is a common and avoidable mess.
• Is a spouse exemption doing the heavy lifting? If so, the real question is the second death. Plans that work on the first death can leave a large bill on the second.
• Would drawing more now cost less than IHT later? Compare the income tax on extra withdrawals today (often 20%) with 40% IHT plus the beneficiary’s income tax later.
• Gifts from surplus income. Regular gifts out of income that leave you able to maintain your normal standard of living are immediately exempt from IHT, with no seven-year wait. Pension income can fund them. Keep records.
• Life cover in trust. A policy written in trust pays out outside the estate and can cover an expected IHT bill. Premiums rise with age, so it is cheaper to arrange earlier.

What not to do

Don’t strip a pension in a hurry because the rules have changed. Taking a large sum out in one year can push you into 40% income tax, which costs as much as the IHT you were trying to avoid, and once it is out, growth on it is taxable too. Model it over several tax years, and for anything beyond the arithmetic, talk to a regulated adviser or a solicitor who deals with estates.

For the full background on bands, gifts, taper relief and Business Relief, read our inheritance tax guide.