TL;DR
Pensions and Inheritance Tax UK 2026 is a key UK topic. This guide covers the rules, current figures and options as of June 2026.
Last reviewed: June 2026
TL;DR
- From 6 April 2027, unused DC pension pots will be included in estates for IHT under the Autumn 2024 Budget.
- Currently (until 5 April 2027), DC pensions sit outside the estate and are not subject to IHT.
- IHT is 40% on the estate value above the nil-rate band of 325,000 pounds.
- Transfers between spouses and civil partners remain IHT-exempt.
- The change significantly reduces the estate planning advantage of keeping money in a pension rather than spending it.
- Planning options include increased pension withdrawals, lifetime giving, and reviewing expression of wishes.
Key Facts
The Current Rules: Pensions Outside the IHT Estate
Until 5 April 2027, defined contribution pension pots are one of the most powerful estate planning tools available in the UK. Because pension trustees have discretion over who receives death benefits, and because the member does not legally own the pension pot in the same way as other assets, DC pensions currently sit outside the member estate for inheritance tax purposes. This means that any unspent DC pension passes to nominated beneficiaries without attracting the 40% IHT charge that applies to other estate assets above the nil-rate band.
This treatment has made DC pensions an attractive holding vehicle for wealth in later retirement, with some affluent retirees deliberately drawing on other assets first and leaving the pension pot as late as possible to pass on to the next generation tax-efficiently. The Autumn 2024 Budget announced an end to this position.
The April 2027 Change
From 6 April 2027, the value of any unused DC pension pot at the member death will be included in the estate for IHT assessment. The pension fund will be added to all other estate assets (property, savings, investments, business interests) and IHT will be charged at 40% on the combined total above the available nil-rate band. The government intends to collect IHT on the pension element before the remaining proceeds pass to the beneficiary, who will then also be subject to income tax on withdrawals (tax-free if the member died before 75, at the marginal rate if after 75).
The potential for both IHT and income tax to apply to the same pension pot is one of the most significant concerns for higher-value estates. For a higher-rate taxpaying beneficiary receiving a pension from someone who died after 75, the combined effective rate of IHT at 40% and income tax at 40% on the remainder could result in an effective tax rate of approximately 64% on the pension.
Who Is Affected
The change affects estates where the total value including the DC pension pot exceeds the available nil-rate band. For a single person with no residential nil-rate band, this means estates above 325,000 pounds in total. For a married couple making use of transferable nil-rate bands and residential nil-rate bands, the combined threshold can be up to 1 million pounds. Estates below the relevant threshold are not affected.
People who have deliberately kept money in their pension in later retirement to pass on tax-efficiently are the most directly affected. Those who were planning to fund long-term care costs from the pension pot, or who were deferring pension access for other reasons, should also review their position before April 2027.
What Planning Steps Are Available
Several planning steps may be worth considering before April 2027. Taking increased pension withdrawals before the change date and using the withdrawn funds for lifetime gifts (which may fall outside the estate after seven years under the potentially exempt transfer rules) could reduce the pension pot subject to the new IHT rules. The annual gift exemption of 3,000 pounds per year and the normal expenditure out of income exemption are also available for regular gifts from surplus income.
Reviewing the expression of wishes is important: the nomination may need to be updated in light of the changed tax position. Using the pension pot to fund long-term care costs directly, or purchasing a product that removes the pension from the IHT estate, are also being discussed in the adviser community. The full interaction between IHT and income tax on pension death benefits under the new rules involves significant complexity and the appropriate response depends heavily on individual circumstances.
FCA-regulated financial advice is strongly recommended for anyone whose estate is likely to be affected by the April 2027 change. The planning options are complex, the tax interactions are significant, and decisions made now (particularly around withdrawals and gifts) may have irreversible consequences.
Frequently Asked Questions
When do pensions become subject to IHT?
From 6 April 2027, under the Autumn 2024 Budget. Until 5 April 2027, DC pension pots remain outside the estate for IHT purposes.
How much IHT will be due on a pension from April 2027?
IHT at 40% applies to the value of the pension pot that exceeds the available nil-rate band when combined with the rest of the estate. The nil-rate band is 325,000 pounds per person. Married couples can combine allowances up to 1 million pounds with residential nil-rate bands. The pension element will also be subject to income tax when the beneficiary withdraws it.
Are pensions left to a spouse still IHT-free?
Transfers between spouses and civil partners are generally IHT-exempt under the spousal exemption. DC pension death benefits paid to a surviving spouse are expected to remain IHT-free, consistent with the general treatment of interspousal transfers.
What should I do before April 2027?
Review your estate position including the pension pot value. Consider whether increased withdrawals, lifetime gifts, or other planning steps are appropriate for your circumstances. Seek FCA-regulated financial advice: the interactions between IHT and income tax on pension death benefits are complex and individual circumstances vary significantly.
