Inheritance Tax on pensions —
the April 2027 change explained

For decades, pensions have sat outside a person's estate for Inheritance Tax purposes — one of the few remaining ways to pass on significant wealth entirely free of the 40% IHT charge. That changes from 6 April 2027. Following Royal Assent of the Finance Act 2026 in March 2026, most unused pension funds and pension death benefits will be brought within the value of a person's estate, ending an exemption that has shaped retirement and estate planning for a generation.

This post explains what the change actually does, who it affects, how the administration will work in practice, and what is worth reviewing before it takes effect.

What's changing

Under current rules (2026/27), most personal and workplace pensions — including money left in drawdown or never withdrawn — fall outside a person's estate for Inheritance Tax purposes. This is because most modern pensions are structured so that scheme trustees, not the member, have the final say over who receives the fund on death, meaning HMRC doesn't treat it as belonging to the deceased's estate.

From 6 April 2027, this changes for deaths occurring on or after that date: most unused pension funds and death benefit lump sums will be included in the value of the deceased's estate, regardless of the trustee discretion structure that currently keeps them outside it. If the resulting estate exceeds the available IHT thresholds, the pension portion can be taxed at up to 40%.

Why the government is doing this

The Treasury's stated reasoning is that pensions receive generous tax relief on contributions and tax-free growth specifically to fund a person's own retirement — not to serve as an intergenerational wealth transfer vehicle free of Inheritance Tax. In recent years, some individuals have deliberately left pension pots untouched — drawing on other savings and investments first — specifically because pensions sat outside the IHT net. This change is designed to close that planning technique.

What stays exempt

The core spousal exemption is preserved. Pension death benefits passing to a surviving spouse or civil partner — provided they are a long-term UK resident — remain exempt from Inheritance Tax, in line with the general spousal exemption that applies to the rest of the estate. Benefits passing to a registered charity also remain exempt.

The change primarily affects pensions passing to anyone else — most commonly adult children, other family members, or beneficiaries outside a marriage or civil partnership.

The double-taxation risk for over-75s

A particularly important detail: if you die aged 75 or over, your beneficiaries may face both Inheritance Tax on the value of the fund and Income Tax when they subsequently withdraw the money. Under existing rules, pension withdrawals by a beneficiary after the member's death at 75 or over are already subject to the beneficiary's Income Tax rate. From April 2027, that Income Tax can sit on top of the new 40% IHT charge on the same funds.

Commentary in the tax press has highlighted that the combined effect of Inheritance Tax and Income Tax on the same pension pot can produce an effective combined rate exceeding 60% in some scenarios — a very significant erosion of value for beneficiaries, and a material change to how pensions should be viewed in overall estate planning.

How the administration will work

This is one of the more complex aspects of the change and represents a genuine shift in process. Under the new rules:

• Personal representatives (executors), not pension scheme administrators, become responsible for reporting and paying any Inheritance Tax due on unused pension funds and death benefits
• Pension scheme administrators must provide information about the value of unused funds and death benefits within four weeks of being notified of the death
• Personal representatives need to establish whether pension benefits are passing to an exempt beneficiary (spouse, civil partner, or charity) or a non-exempt one, and the split between the two must generally be confirmed within a defined window once beneficiaries are determined
• A new Pensions Direct Payment Scheme allows personal representatives or beneficiaries to instruct the pension scheme administrator to pay the Inheritance Tax due directly to HMRC from the fund, rather than the estate having to find the cash elsewhere first
• Personal representatives can also instruct scheme administrators to withhold up to 50% of the benefit entitlement for up to 15 months after the end of the month of death, providing a safeguard while the full IHT position is established

Who this genuinely affects

The vast majority of estates in the UK do not currently pay any Inheritance Tax and are expected to remain unaffected by this change — it only bites where an estate, pension included, exceeds the available nil-rate bands. It is most relevant if:

• You hold a meaningful pension pot alongside other assets — savings, investments, property — that together with the pension could exceed your available IHT thresholds
• You have deliberately been leaving your pension untouched, planning to pass it on tax-free, while drawing on other assets during retirement
• Your intended pension beneficiaries are not a spouse or civil partner — for example, adult children
• You are likely to die aged 75 or over, given the additional Income Tax exposure this creates for beneficiaries

What to consider before April 2027

• Review your pension nomination. If your pension currently names children or grandchildren as beneficiaries rather than a spouse, it's worth understanding the IHT exposure this will create from April 2027 and discussing whether nominations should change.
• Reconsider the order in which you draw down retirement income. The historic strategy of spending other assets first and preserving pensions until last, specifically for IHT purposes, needs re-examining — it may no longer be the most efficient approach once pensions are inside the IHT net.
• Think about lifetime gifting as part of a wider estate planning review, subject to the normal 7-year rule and other gifting reliefs, as a way of managing overall estate value ahead of the change.
• Talk to your executor or personal representative about the new administrative burden this creates, particularly around the tight reporting windows.
• Don't make drastic decisions based on speculation alone. The primary legislation is now law, but detailed HMRC guidance is still being finalised — some practical elements of how this works are expected to be clarified over the course of 2026.

This article is for general information purposes and does not constitute tax or financial advice. Inheritance Tax and pension rules are complex, and HMRC guidance on this change continues to develop. Always speak to a qualified financial adviser or accountant regarding your own estate planning.