Pensions in Your Estate from April 2027: How the IHT Inclusion Actually Works

Updated 10 May 2026 · Last reviewed 10 May 2026 · Reading time ~15 min

From 6 April 2027, unused defined-contribution pension funds and most death benefits will fall inside the deceased's estate for inheritance tax purposes. The change was announced at the Autumn Budget 2024, confirmed and timed at the Autumn Budget 2025, and will be legislated in Finance Act 2026. It is the most significant change to the IHT treatment of pensions in twenty years.

The change affects defined-contribution pots — personal pensions, SIPPs, stakeholder pensions, and the DC element of any hybrid scheme. It does not affect the regular income from a defined-benefit pension. Charity bequests from pensions remain free of IHT. The current rules — under which most DC pensions pass outside the estate — apply only until 5 April 2027.

This article explains the mechanics of the new rules, walks through three worked examples at different estate sizes, and sets out the planning levers that remain available. Anyone with a DC pension worth more than £100,000 or so will want to think carefully about this before April 2027.

What the rule actually does

Today, when someone dies with money still inside a DC pension, that money usually passes to nominated beneficiaries outside the IHT estate. There is no 40% IHT charge on the pot. If the death is before age 75, the beneficiary can typically draw it tax-free; from age 75 it is taxed at the beneficiary's marginal income tax rate when drawn.

From 6 April 2027, the position changes. Unused DC pension funds become a chargeable asset in the estate alongside property, savings, and investments. The estate's combined value is tested against the nil-rate band (£325,000) and the residence nil-rate band (up to £175,000 where the home passes to direct descendants). Anything above the available bands is taxed at 40%.

The income tax position on death after age 75 is unchanged. So a £400,000 pension pot inherited by a higher-rate taxpaying child after the parent dies at age 80 could face: 40% IHT on the part above the nil-rate bands, then 40% income tax when the child draws what is left. The combined effective rate on that slice is 64%.

The Treasury's stated rationale, in the Autumn Budget 2024 documents, is that pensions were never intended to be vehicles for inter-generational wealth transfer. They were intended to fund retirement. Any unused balance at death was historically expected to be small. As DC pots have grown — driven by auto-enrolment, the abolition of the lifetime allowance, and longer working lives — the IHT exemption has become a significant and rising tax leakage. The new rule closes that.

Worked example one: the £600,000 estate with a £200,000 pension

Susan dies in May 2027 at age 78. Her estate is: a £400,000 home (passing to her daughter), £40,000 in cash and ISAs, and a £200,000 SIPP that she had not drawn down. Total £640,000.

Under the rules in force for deaths before 6 April 2027, the £200,000 pension would pass outside the estate. The chargeable estate is £440,000. Available bands: £325,000 nil-rate plus £175,000 residence nil-rate (because the home passes to a direct descendant) = £500,000. Below the threshold; no IHT.

Under the rules for deaths from 6 April 2027 onwards, the £200,000 pension is added in. Chargeable estate: £640,000. Available bands: £500,000. £140,000 above the threshold, taxed at 40% = £56,000 IHT.

The same family, the same assets, the same beneficiary — but a £56,000 IHT bill that would not previously have existed. Susan's daughter receives £56,000 less than she would have under the old rules.

The lever Susan had during her lifetime was to draw down the SIPP and either spend it, gift it (subject to the seven-year rule), or move it into a different wrapper that her daughter could inherit more efficiently. Doing nothing is the most expensive option.

Worked example two: the £1.4M estate with a £500,000 pension

James dies in late 2028 at age 82. His estate: a £700,000 home, £200,000 in ISAs, and a £500,000 SIPP. Total £1.4M.

Under the new rules the full £1.4M is in the estate. Available bands: his own £325,000 plus £175,000 residence nil-rate (passing the home to children). His wife predeceased him having used none of her allowances, so her transferable nil-rate band of £325,000 and her residence nil-rate band of £175,000 are also available. Total available: £1,000,000. Chargeable above the threshold: £400,000. IHT at 40%: £160,000.

Of that £160,000, the £500,000 pension contributes about £200,000 to the chargeable amount, producing roughly £80,000 of the IHT bill. The other £80,000 of IHT is on the property and ISA holdings, which would have been chargeable under the old rules too.

James's children then have to draw the pension itself, paying income tax on the full pot at their marginal rates because James died after age 75. If they are higher-rate taxpayers, that is another £200,000 in income tax. Combined effective rate on the pension slice: roughly 56%.

The available levers during James's lifetime were: drawing down the pension over a longer period to use his own personal allowance and basic rate band each year, gifting from surplus income (an underused IHT exemption that requires record-keeping but no seven-year wait), and using the £3,000 annual gifting allowance.

Worked example three: a couple with combined £2.4M and £900,000 in pensions

Asha and Daniel are both 70, both still alive in May 2026. Combined estate: a £1.2M home in the Home Counties, £300,000 in ISAs and savings, and £900,000 in pensions split £550,000 (Asha) and £350,000 (Daniel). They have two adult children.

If they continue on their current path and both die after April 2027 with the pensions undrawn, their combined estate is £2.4M. Combined available bands: £650,000 nil-rate (his and hers) plus £350,000 residence nil-rate (taper applies to estates above £2M, so this is reduced). Above £2M, the residence nil-rate band tapers away at £1 for every £2. With a £2.4M estate, £400,000 is over the £2M threshold, so the residence nil-rate is reduced by £200,000, leaving £150,000 of residence band available. Total available bands: £800,000. Chargeable above threshold: £1.6M. IHT at 40%: £640,000.

Add the income tax their children will pay drawing the pensions (£900,000 at higher-rate income tax, roughly £360,000), and the family loses about £1M of the £2.4M between IHT and income tax — close to 42%.

For estates of this size the planning levers are substantial:

• Pension drawdown over a longer time horizon. Drawing £30,000 to £50,000 a year between now and age 90 uses up the pots in a tax-efficient way and reduces what falls in the estate.
• Gifting from surplus income. If they have pension and other income above their living costs, regular gifts to children fall outside the estate immediately, no seven-year rule, with adequate documentation.
• Annual £3,000 gifting allowance each. £6,000 a year between them, plus carried-forward unused allowance from the prior year if any.
• £250 small gift exemption per recipient per year.
• Wedding gifts: £5,000 from each parent to a child marrying.
• Charity bequest. 10% of the net estate to charity reduces the IHT rate from 40% to 36% on the remainder.

What stays outside the new rules

Three categories remain outside the IHT estate:

• Charity legacies from pensions. A bequest of pension funds to a UK-registered charity remains exempt.
• Defined-benefit pensions in payment. A spouse's continuing pension from a DB scheme is not affected — it is income, not a transferable pot.
• Life insurance written into trust. Standalone term life insurance arranged in trust is outside the estate.

These remain useful. A whole-of-life policy in trust can provide funds to pay an IHT bill without itself being part of the estate. For larger estates this is a long-standing planning route.

What the law has not yet finalised

Several details are subject to final legislation in Finance Act 2026 and HMRC's accompanying guidance:

• The exact treatment of pensions in payment via flexi-access drawdown where some funds are uncrystallised.
• The interaction with overseas pension schemes and qualifying recognised overseas pension schemes.
• Reporting and administrative timelines for pension scheme administrators to provide IHT-relevant information to executors.

HMRC published a technical consultation in late 2025 and will publish responses ahead of the legislation. We will update this article when the final position is confirmed.

Frequently asked questions

Does this affect my pension during my lifetime?

No. The change affects what happens to unused pension funds at death. Your pension contributions, tax relief, drawdown options, and 25% tax-free lump sum during your lifetime are all unchanged.

What if I die before 6 April 2027?

The current rules apply. Your DC pension passes outside the estate for IHT, with the existing income tax position depending on whether you died before or after age 75.

Should I draw my pension down early to avoid IHT?

The right answer depends on your wider position — your other income, your spouse's situation, your expected longevity, and what you would do with the drawn funds. Money drawn from the pension and held outside immediately becomes part of your estate too unless gifted. There is no general rule; this is exactly the question to take to a financial planner.

Does the seven-year rule still apply to pension funds drawn and gifted?

Yes. Money drawn from your pension and gifted is treated as a potentially exempt transfer if outside the £3,000 annual allowance. If you survive seven years from the date of the gift, it falls outside the estate. If you die within seven years, it tapers in.

What about my workplace pension?

Workplace DC pensions are affected the same way as personal SIPPs. Workplace DB pensions in payment to a surviving spouse are not affected — those payments are income, not a chargeable pot.

Will the residence nil-rate band still apply?

Yes. The £175,000 residence nil-rate band continues to apply where the home passes to direct descendants. The taper above £2M of estate value continues to apply too — and the inclusion of pensions in the estate makes more families subject to the taper than before.

The interaction with spousal exemption and the residence nil-rate band

Two long-standing IHT mechanics matter for couples planning around the April 2027 change.

First, transfers between spouses or civil partners are completely exempt from IHT. So if one spouse dies first, leaving everything to the surviving spouse, no IHT is payable at the first death. The deceased's nil-rate band (£325,000) and residence nil-rate band (£175,000) are unused at the first death. Both can transfer to the surviving spouse and become available at the second death — doubling the available threshold from £500,000 to £1,000,000 for a couple's combined estate.

Second, the residence nil-rate band tapers above £2M of estate value. For every £2 of estate above £2M, the residence nil-rate band reduces by £1. By £2.7M (single estate) or £2.7M (combined estate at second death using transferred RNRB), the residence nil-rate is zero.

The April 2027 change brings DC pensions into the estate, which means more couples cross the £2M threshold and lose some or all of their RNRB. A couple whose home is worth £900,000, who hold £400,000 in ISAs and savings, and who have £800,000 in combined DC pensions had a £2.1M estate. Under pre-2027 rules, the pensions are outside the estate, so the chargeable estate is £1.3M and full RNRB applies. Under post-2027 rules, the £2.1M estate triggers some RNRB taper and the available bands drop, increasing the IHT bill.

Trust planning under the new rules

Discretionary trusts have long been part of estate planning toolkits. Their treatment under the new pension rules is mostly unchanged — the trust pays tax on transfers in (lifetime entry charge) and at ten-year anniversaries (periodic charge), at rates linked to but lower than 40%. The change is that pension funds passed into a trust on death now carry the same IHT treatment as other estate assets.

Bypass trusts — sometimes called pilot trusts — were a structure under which pension death benefits were paid into a discretionary trust rather than direct to a named beneficiary. Under pre-2027 rules, this allowed the pension to fund a flexible pot for the family without the funds being inside any individual's estate. Under post-2027 rules, the pension benefits now sit in the deceased's estate first, are taxed at 40% on the slice above the bands, and then the after-tax amount goes into the trust. The IHT efficiency of the bypass trust is largely lost.

For larger estates, dedicated estate planning trusts and life insurance written into trust remain useful. The standard whole-of-life policy in trust funds an IHT bill without itself adding to the estate — and policies of this kind have become more relevant since the pension change as families look for ways to provide liquidity for executors who otherwise might have to sell illiquid assets to pay the IHT bill in the six-month window after death.

The administrative reality for executors

One of the underestimated aspects of the change is the administrative burden. Under pre-2027 rules, pension funds bypassed the estate entirely — the executor's IHT400 form did not need to include them, and pension scheme administrators handled distribution to nominated beneficiaries directly.

From April 2027 onwards, executors will need to include pension fund values in the IHT400, will need to obtain valuation information from each pension scheme administrator at the date of death, and will need to coordinate IHT payment timing with the scheme's payment timing. HMRC's published consultation in late 2025 acknowledged that the scheme administrator information flow is a significant operational issue and committed to working with the pensions industry on a standard data feed.

The practical implication for families is: estates with multiple pensions across different providers will take longer to settle, and the existing six-month IHT payment deadline may be hard to meet without the executor needing to apply for an extension or pay IHT from other estate assets while pension valuations are confirmed.

Why the income tax change at age 75 still matters

The April 2027 change is purely about IHT. The pre-existing income tax treatment of pension death benefits — which depends on whether the original pension holder died before or after age 75 — is unchanged. The combined effect on a beneficiary inheriting a pension where the deceased was over 75 is therefore: 40% IHT on the slice above the bands at the estate level, then income tax at the beneficiary's marginal rate on whatever they then draw from the pension.

For a basic-rate beneficiary, the income tax slice is 20%. For a higher-rate beneficiary, 40%. For an additional-rate beneficiary, 45%. The combined IHT-plus-income-tax rate on the higher-rate slice is 64%; on the additional-rate slice, 67%.

If the original pension holder died before age 75, the beneficiary draws the pension free of income tax (within the deceased's lump sum and death benefit allowance, currently £1,073,100). The IHT charge at the estate level still applies, but the second layer is removed. This makes the dying-before-75 outcome materially better for the family — a fact that is not changed by the new rules but which becomes more important under them.

Three planning frameworks that still work

Three approaches remain effective and are worth considering for any family with significant DC pension assets:

Drawdown over a longer time horizon

Drawing the pension over twenty or twenty-five years rather than leaving it untouched until death achieves two things. It uses up your personal income tax allowance and basic rate band each year — drawing £15,000 to £20,000 a year is roughly tax-free if you have no other earned income. It also reduces the pot that ends up in the estate. The drawn money becomes part of your estate (unless gifted) but you can spend it, gift it under the seven-year rule, or use it to make further pension contributions to a spouse's pension.

Gifts from surplus income

Section 21 of the Inheritance Tax Act 1984 exempts gifts made out of normal expenditure where the gifts are habitual, made out of income (not capital), and do not reduce the giver's standard of living. There is no upper limit and no seven-year rule. The gifts fall outside the estate immediately. The catch is documentation: HMRC routinely audits such claims, and without records of income, expenditure, and gift patterns, the exemption fails.

For families with pension income above their living costs, this is one of the most powerful tools available. Make sure to keep a record of: monthly income, monthly expenditure, the surplus, and the gift pattern (recipient, date, amount). The HMRC IHT403 form requires this detail at probate.

Charity legacy with the 10% rate reduction

Leaving 10% or more of the net estate to charity reduces the IHT rate on the remainder of the chargeable estate from 40% to 36%. For families who plan to leave charitable bequests anyway, the reduction can mean the family receives the same after-tax amount despite the larger charitable bequest. The arithmetic only works at certain estate sizes; check the specifics for your case.

What is the deadline for paying IHT?

Six months from the end of the month in which the death occurred. Interest accrues on unpaid amounts at HMRC's standard rate. For estates that include illiquid assets (property, business interests), HMRC allows IHT on those specific assets to be paid in ten annual instalments, but interest accrues on the unpaid balance.

Is there any way to insure against the new IHT?

Yes. Whole-of-life insurance written into trust pays out on death, with the payout outside the estate (because it is in trust). Premiums are typically several thousand pounds a year for cover of £200,000 or more, and rise with age. For wealthier families, this is a long-established route to ensure executors have liquidity to pay IHT without selling assets.

What if I have already nominated beneficiaries on my pension?

Your nominations remain valid and pension scheme administrators will continue to follow them. The change is in how the resulting payment is taxed, not who receives it. Review your nominations periodically to make sure they reflect your current wishes, particularly after life events (marriage, divorce, birth of children).