Pensions and Inheritance Tax from April 2027: What Changes, Who Pays and How Much

What is changing on 6 April 2027?

For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be counted as part of the deceased person's estate for inheritance tax. The change was announced in the October 2024 Budget, consulted on twice, and became law when Finance Act 2026 received Royal Assent on 18 March 2026. HMRC's technical note on inheritance tax on pensions sets out how it works.

Until now a defined contribution pension has been one of the few large assets that could pass to children free of inheritance tax, because most schemes hold the money on discretionary trust and the pot never formed part of the estate. That made the standard planning advice for wealthier retirees "spend your ISA first and leave the pension alone". From April 2027 that advice reverses for many families. The government's reasoning is that pensions are meant to fund retirement, not to pass wealth on tax-free.

Nothing changes for anyone who dies before 6 April 2027, and nothing changes to the income tax rules for pensions, tax-free cash or the age-75 test. Use our inheritance tax calculator to see the bill under both the old and the new rules for your own estate.

What counts and what is excluded

The rules apply to registered pension schemes, qualifying non-UK pension schemes and section 615(3) schemes. The value brought into the estate is the "notional pension property":

• Defined contribution (money purchase) pensions: the value of the pot that could be used to pay death benefits, including drawdown funds and uncrystallised funds, plus anything the scheme would reasonably be expected to pay on death.
• Defined benefit pensions: lump sum death benefits the scheme must pay or would reasonably be expected to pay, and continuing payments such as the balance of an annuity guarantee period.

Some benefits stay outside the charge:

• Dependants' scheme pensions paid to a spouse, civil partner, child or someone financially dependent on the member.
• Death in service benefits, where the payment is made only because the member was employed immediately before death.
• Dependants' annuities bought together with a lifetime annuity, and trivial commutation lump sums that end a dependant's pension.

Two exemptions matter most. Anything passing to a spouse or civil partner who is a long-term UK resident is exempt, as it is for the rest of the estate. Anything passing to a registered charity is exempt, and a charity lump sum death benefit is free of income tax even if the member was over 75. In both cases the value still counts towards the size of the estate, which matters for the residence nil-rate band taper explained below.

How the tax is worked out

The pension value is simply added to everything else. The estate then gets the usual allowances: the £325,000 nil-rate band, the £175,000 residence nil-rate band if a home passes to direct descendants, and any unused allowances transferred from a spouse or civil partner who died first. Whatever is left is taxed at 40%, or 36% if at least 10% of the baseline amount goes to charity. Both allowances are frozen until April 2031, so the pension change comes on top of thresholds that have not moved for years.

The residence nil-rate band is withdrawn by £1 for every £2 of net estate above £2 million. Because the pension now counts towards that £2 million, some estates lose part of the £175,000 allowance as well as paying tax on the pension itself.

Worked examples

These figures come from the inheritance tax calculator and use the 2026/27 allowances, which stay frozen through April 2027.

A widower with a £200,000 pension

He leaves a £400,000 home to his daughter, £150,000 of savings and a £200,000 unused pension pot. Before April 2027 the pension is ignored: the £550,000 estate less £500,000 of allowances leaves £50,000 taxable and a bill of £20,000. From April 2027 the estate is £750,000, £250,000 is taxable and the bill is £100,000. The rule costs his daughter £80,000, which is exactly 40% of the pension.

A widow whose late husband left everything to her

She has inherited 100% of his unused allowances, so she can pass on £1 million tax-free: a £600,000 home, £400,000 of investments and a £300,000 pension. Before April 2027 there is no tax at all. From April 2027 the £1.3 million estate exceeds the allowances by £300,000 and the bill is £120,000.

A couple, first death to the spouse

If the first partner to die leaves the pension to the survivor, the spouse exemption means no inheritance tax on the first death. The survivor can then draw on it, and whatever is left when they die is taxed with the rest of their estate. The exemption defers the charge; it does not remove it.

A larger estate that loses its residence allowance

A single person with a £900,000 home passing to children, £800,000 of investments and a £500,000 pension has a £2.2 million estate under the new rule. The residence nil-rate band is reduced by £100,000 (half the £200,000 excess over £2 million) to £75,000. The bill rises from £480,000 under the old rule to £720,000: £200,000 from the pension itself and £40,000 from the lost residence allowance.

The double charge after 75

Income tax on inherited pensions is unchanged. If the member dies before 75, beneficiaries can usually draw the money free of income tax within the lump sum and death benefit allowance. If the member dies at 75 or over, beneficiaries pay income tax at their own marginal rate on what they draw. From April 2027 that income tax sits on top of the inheritance tax.

Finance Act 2026 softens this: the part of the pension that was used to pay inheritance tax does not count as the beneficiary's taxable income. On a £100,000 pension inherited from someone over 75 by a child who is a higher-rate taxpayer, inheritance tax of £40,000 leaves £60,000, and income tax at 40% on that leaves £36,000, an overall rate of 64%. For an additional-rate taxpayer the overall rate is 67%. A basic-rate beneficiary who spreads withdrawals over several years pays much less.

Who reports it and who pays

The personal representatives (the executors or administrators) are responsible, not the pension scheme. The process set out in the technical note is:

1. The personal representatives identify every pension the deceased held and ask each scheme for a valuation. Schemes must respond within 28 days, or give an estimate and confirm within 14 days of obtaining the final figure.
2. The total notional pension value is reported to HMRC on the inheritance tax account with the rest of the estate.
3. The tax is due by the end of the sixth month after the month of death, after which interest runs.
4. Where tax is likely, the personal representatives can ask the scheme to withhold up to 50% of the benefits for up to 15 months after the end of the month of death, so the money is not paid out before the bill is settled.
5. The personal representatives, or a beneficiary, can serve a payment notice on the scheme, which then pays the tax (a minimum of £1,000 and no more than the actual liability) straight to HMRC within 35 days and reduces the benefits by that amount. This is the Pensions Direct Payment Scheme.

Beneficiaries become jointly liable once benefits are paid to them, and a scheme that ignores a valid withholding or payment notice becomes jointly liable too. Instalment payments, business relief and agricultural relief do not apply to pension property, and quick succession relief applies where the same pension was taxed within the previous five years.

Planning options that still work

• Check the nomination. The expression of wish form tells the scheme who should receive the pot. Leaving it to a spouse or civil partner keeps it exempt on the first death; leaving it to children exposes it to 40%. Old forms naming a former partner, or nobody, are common.
• Draw the pension and spend or gift it. Withdrawals are taxed as income, but regular gifts out of surplus income are immediately exempt from inheritance tax, and larger gifts fall out of the estate after seven years with taper relief from year three. Our calculator models gifts made within seven years.
• Reconsider the ISA-first rule. For estates that will be taxable, drawing from the pension and leaving the ISA can be better than the reverse, although income tax on withdrawals and the loss of tax-free growth need to be weighed. This is where personal advice pays for itself.
• Leave part of the pension to charity. Charity nominations are exempt from both taxes, and a gift of 10% of the baseline amount cuts the rate on the rest of the estate to 36%.
• Life insurance in trust. A policy written in trust pays out outside the estate and can fund the bill without forcing the sale of a home or an early pension withdrawal.
• Equalise between spouses. Each person has their own £325,000 and £175,000. A pension held entirely by one partner is worth reviewing alongside who owns the other assets.
• Annuities and guarantee periods. A lifetime annuity converts the pot into income that stops at death (or after a guarantee period), which removes it from the estate at the cost of flexibility.

What is not changing

The 25% tax-free lump sum, the £60,000 annual allowance, the age-75 rule for income tax on death benefits, and the treatment of ISAs (which have always been in the estate) are all unchanged. The Autumn Budget on 28 October 2026 could adjust inheritance tax further, but the pension measure is already law and the allowances are already frozen, so the sensible course is to plan on the rules as legislated. Our Autumn Budget 2026 guide covers what else is expected.