Inheritance Tax on Pensions 2027: What Changes from April 2027 and Who Is Affected

What Is Changing With Pensions and Inheritance Tax

Under the rules in place until 5 April 2027, most unused pension funds held under registered pension schemes are outside a person's estate for IHT purposes. When a pension scheme member dies with unused pension savings, those funds are generally paid to beneficiaries at the discretion of the scheme trustees, free of IHT. This has made unused pension funds a widely used vehicle for passing wealth to the next generation without inheritance tax.

From 6 April 2027, this exemption is being removed. Unused pension funds and most pension death benefit lump sums will be included in the deceased's estate and subject to IHT at 40% on any amount above the nil-rate band. This is a significant change to the tax landscape for anyone with substantial pension savings who intended to leave them to beneficiaries.

Who Will Be Affected

The change affects people who die on or after 6 April 2027 with unused pension funds in registered pension schemes, qualifying non-UK pension schemes (QNUPS), or section 615 schemes. If a person has already accessed (drawn down) all of their pension savings before death, the change does not apply to those funds -- they would already have been taken as income and any remainder would have been spent or held in other assets.

The government estimates that of around 213,000 estates per year that will include pension wealth from 2027/28, approximately 10,500 will face an IHT charge as a result of the inclusion of pension funds. Most estates -- those where the total value including the pension remains below the nil-rate band and any applicable residence nil-rate band -- will not be affected.

The people most likely to be affected are those with large defined contribution (DC) pension pots who have deferred drawing their pension, particularly those who have other income sources and have used the pension as an estate planning vehicle rather than for retirement income.

How Will the New IHT on Pensions Work

Under the new system, when a person dies, their personal representative (executor) will need to identify all pension savings held across all schemes, obtain valuations from pension scheme administrators (PSAs), and include these in the IHT calculation alongside other estate assets. HMRC published a technical note in May 2026 providing further detail on the process.

The IHT due on pension funds can be paid in two ways. Where the IHT liability is at least £1,000, the personal representative can give notice to the pension scheme administrator directing them to pay the IHT attributable to that pension directly to HMRC within 35 days. Alternatively, the IHT can be paid from other estate assets. The overall IHT deadline of six months from the date of death remains unchanged.

HMRC has acknowledged that the process will place a significant administrative burden on personal representatives, who may need to chase multiple pension providers for valuations while managing other aspects of estate administration. HMRC plans to provide calculators, process maps and guidance ahead of the April 2027 implementation date.

What About Gifts to Charity

Gifts to registered charities are exempt from IHT, including under the new pension rules. If pension death benefits are paid to a charity, no IHT will apply to those funds. The existing rules allowing estates to qualify for a reduced 36% IHT rate (instead of 40%) if 10% or more of the net estate is left to charity are preserved and extended to include pension funds in the calculation.

Estate Planning Considerations Before April 2027

The change gives people with substantial pension savings less than a year to consider their options. Potential approaches include drawing down pension income during lifetime to reduce the unused fund, making use of pension contributions to reduce the overall estate, using gifts and the annual exemption, or reviewing beneficiary nominations on existing pension schemes. Life insurance written in trust can also be used to provide funds to pay an anticipated IHT liability without increasing the estate.

Given the complexity of IHT and pension planning, individuals with significant pension savings should seek advice from an FCA-authorised financial adviser or a regulated solicitor before April 2027.

Frequently Asked Questions

Will my pension be subject to inheritance tax from 2027?

If you die on or after 6 April 2027 with unused pension savings, those funds will generally be included in your estate for IHT purposes. Whether IHT is actually due depends on the total value of your estate including the pension. Most estates will remain below the nil-rate band thresholds and will not face an IHT charge.

Does the IHT pension change affect defined benefit pensions?

The change primarily targets unused funds in defined contribution (DC) pensions. Defined benefit (DB) pensions that pay a pension income to a spouse or dependant on death are generally treated differently. The detailed rules for DB lump sum death benefits under the new regime are set out in the draft legislation and HMRC technical guidance.

When was the IHT pensions change announced?

The change was announced by Chancellor Rachel Reeves in the October 2024 Autumn Budget. Draft legislation was published in the Finance Bill 2025-26. HMRC published a technical note in May 2026 with further implementation detail.

How many estates will be affected by the IHT pension change?

The government estimates approximately 10,500 estates per year will face an IHT charge as a result of the inclusion of pension funds, based on projections for 2027/28. This is out of approximately 213,000 estates that will include pension wealth.