Inheritance Tax on Pensions From April 2027

From 6 April 2027, most unused pension funds and pension death benefits will count as part of your estate for inheritance tax. Whatever sits above your tax-free thresholds is taxed at 40%, and if you die at 75 or over, the people who inherit the pension also pay income tax on what they draw from it.

Until now, most private pensions have passed to the family outside the estate, which is why many people have treated a pension as the last pot to spend. HMRC’s own estimate is that 10,500 estates will have an inheritance tax bill in 2027 to 2028 that would not have had one before, and around 38,500 will pay more, with the average bill rising by about £34,000 once pensions are included.

What Changes for Pensions on 6 April 2027

The change was made law by Finance Act 2026, which received Royal Assent on 18 March 2026. It applies to deaths on or after 6 April 2027. HMRC’s technical note on inheritance tax and pensions confirms that if someone dies before that date, the current rules apply even when the pension is paid out to the family afterwards.

The pensions brought into the estate are the ones with money left to pass on: personal pensions, SIPPs, workplace pension pots and drawdown funds, along with lump sums paid out of a pension when someone dies. The value counted is what the pension held immediately before the death.

Some pension benefits stay outside the estate:

• death in service benefits paid from a registered pension scheme to the family of someone still working for that employer
• a dependant’s pension, such as the widow’s or widower’s pension from a final salary scheme
• a joint life annuity bought together with the member’s own annuity
• pension money left to a husband, wife or civil partner, or to a charity, which is exempt as any other gift to them would be, although it still has to be reported

The tax-free thresholds themselves are not changing. Everyone has a nil-rate band of £325,000, and a residence nil-rate band of up to £175,000 when a home goes to children or grandchildren. The government has fixed both until 5 April 2031.

Anything a husband, wife or civil partner does not use passes to the survivor, so a couple can leave up to £1 million between them before inheritance tax starts, as the transferable nil rate band guide explains.

Why a Large Pension Can Cost More Than 40%

A large pension adds its own value to the estate, and it can also take away part of the tax-free allowance and leave the family with income tax to pay.

The first effect is the £2 million taper. The residence nil-rate band reduces by £1 for every £2 that an estate is worth above £2 million. Many estates that sat comfortably below £2 million will pass it once a pension is counted, and a couple’s combined £350,000 residence allowance is lost completely at £2.7 million.

The second effect is income tax. When someone dies before 75, inherited pension income and lump sums are usually free of income tax. When they die at 75 or over, every pound the beneficiaries draw is taxed as their income.

HMRC has confirmed that the part of the pension used to pay inheritance tax is taken out of the taxable amount, so the family does not pay income tax on the inheritance tax.

On each £1 of pension above the thresholds, inheritance tax takes 40p. A beneficiary paying higher-rate income tax at 40% then loses 24p of the 60p left, so the family keeps 36p. An additional-rate taxpayer at 45% keeps 33p, and a large withdrawal in one year can also cut the beneficiary’s personal allowance, which goes down by £1 for every £2 of income above £100,000.

Three of the usual ways of easing an inheritance tax bill do not apply to pension money. It cannot be paid in instalments over 10 years, it does not qualify for business or agricultural relief, and there is no relief if the investments fall in value after the death.

A Worked Example: A Retired Couple With a £900,000 Pension

This example is based on a retired couple whose situation was reported in the national press this year. I have left out their names and filled in the values the article did not give, so treat the figures as an illustration.

The husband is 70 and his wife is 60. He has a private pension of £900,000 that he has not touched. Between them they have:

Asset	Value
His private pension	£900,000
Their home	£600,000
A second property, let for £6,000 a year	£250,000
ISAs, £80,000 each	£160,000
Cash savings	£150,000
Total including the pension	£2,060,000

They also receive full state pensions. They want to keep travelling while they can and leave the rest to their children without a large tax bill.

Say the husband dies first and leaves everything to his wife, including the pension, which he has nominated to her. Gifts between spouses are exempt, so there is nothing to pay on his death.

His own estate, the pension plus his half of everything else, comes to £1,480,000, which is under £2 million, so his unused nil-rate band and residence nil-rate band both pass to her in full. Had his share been over £2 million, the taper would have cut the allowance he could pass on.

When the wife dies, she leaves everything to the children, home included. Assuming the values have not changed, the bill looks like this:

	Pension outside the estate	Pension counted from April 2027
Estate	£1,160,000	£2,060,000
Nil-rate bands (hers and his)	£650,000	£650,000
Residence nil-rate bands	£350,000	£320,000
Taxed at 40%	£160,000	£1,090,000
Inheritance tax	£64,000	£436,000

The bill rises by £372,000. Most of that is 40% of the pension itself, and £12,000 of it comes from the estate going £60,000 over the £2 million line, which takes £30,000 off the residence allowance.

If the wife is 75 or over when she dies, the children also pay income tax on the pension money as they draw it, after the share used for inheritance tax is taken off. For children paying higher-rate income tax, the two taxes together would take more than half of the £900,000.

What to Do About Your Pension Before April 2027

The new rules only bite on deaths from 6 April 2027, but the most useful planning takes years to work, because gifts need seven years to fall out of the estate in full. These are the steps I go through with couples in the position of the example above.

Change the Order You Spend Your Savings

The usual advice has been to live on ISAs and cash first and leave the pension untouched, because the pension passed outside the estate. From April 2027 the pension and the ISAs are both in the estate, and the pension can also carry income tax for the children. For many people it now makes sense to draw more from the pension to live on and leave the ISAs, which can be withdrawn tax-free at any time.

You can usually take up to 25% of a pension as a tax-free lump sum, with a maximum of £268,275. Withdrawals above that are taxed as income, so the amount to draw each year depends on which income tax band it falls into. Drawing money you then leave sitting in a bank account does not help, because it stays in the estate.

Give From Surplus Income

Regular gifts made from income are free of inheritance tax straight away, with no seven-year wait and no limit on the amount, as long as you can afford them after your usual living costs and they come from regular income rather than savings. For the couple in the example, their state pensions and the £6,000 a year in rent count as income, and regular taxable withdrawals from the pension can count too, depending on the facts.

HMRC’s technical note says the pension changes do not alter how this exemption works for gifts made from pension withdrawals, and that each case is tested against the exemption’s conditions on its facts. The executors will need to show HMRC a pattern, so keep a simple record each year of income, spending and what you gave, and to whom.

Make Larger Gifts Early and Use the Seven-Year Rule

Larger gifts to children or grandchildren fall outside the estate once you have lived seven years after making them. Everyone can also give £3,000 a year with no wait at all, plus small gifts of up to £250 to as many people as you like, as long as you have not used another allowance on the same person, which the small gift exemption guide covers.

In the example, if the husband took his £225,000 tax-free lump sum and gave it to the children, and lived seven more years, the estate would fall to £1,835,000. That brings it back under £2 million, the full residence allowance returns, and the final bill drops from £436,000 to £334,000, a saving of £102,000. If he died within seven years, the gift would come back into the calculation, with taper relief reducing the tax on it where the gifts total more than £325,000 and were made more than three years before the death.

If you keep using what you gave away, such as living in a house you handed to your children without paying them rent, it still counts as yours, as the page on putting your house in your son’s name explains.

Put Money Into a Trust

A trust lets you give money away while you, as a trustee, keep a say in how and when the family receives it. Money you draw from your pension can go into one like any other gift. Gifts into most trusts of up to £325,000 every seven years carry no tax at the time, while anything above that is taxed at 20% when it goes in, and further tax can be due if you die within seven years. Trusts have running costs and their own tax returns, so they suit larger sums, and the guide to using a trust for inheritance tax goes through the main types.

Take Out Life Cover Written in Trust

For a couple who want to keep their money for their own use, a joint life insurance policy that pays out on the second death can meet some or all of the bill.

Written in trust, the payout goes to the children outside the estate, so the policy does not add to the tax it is there to pay. Premiums paid regularly from surplus income can themselves count as exempt gifts. The cost depends on your ages and health, so get a quote before you rely on it.

Check Who Your Pension Is Nominated To

Pension trustees decide who receives the money, guided by the expression of wishes form you gave them, so check what yours says and when you last updated it. Pension money paid to a husband, wife or civil partner is exempt, which buys time but adds to the survivor’s estate. If you leave 10% or more of your net estate to charity, the rate on the rest falls to 36%, and a charity lump sum paid from a pension counts toward that 10%.

What Executors Will Have to Do With a Pension

From April 2027, the executors, or the family members applying for letters of administration where there is no will, report and pay the inheritance tax on the pension along with the rest of the estate. They will have to contact every pension scheme the person belonged to, get the value at the date of death and include it on the inheritance tax account. Where inheritance tax is due, probate cannot be applied for until that account is submitted and the tax is paid.

The tax on a pension is due by the end of the sixth month after the death, as for the rest of the estate, and interest runs after that, as the guide to the 6-month rule for probate sets out. To make sure the money is there, the executors can tell a pension scheme to hold back up to 50% of the taxable benefits for up to 15 months and pay the tax to HMRC directly from it. Exempt benefits and the benefits that stay outside the estate cannot be held back.

Once a beneficiary has been chosen by the pension trustees, that beneficiary shares responsibility for the tax on their part of the pension. A pension nobody knew about can turn up years later, so a list of every pension you hold, with the provider’s name and policy number, kept with your will, will save your executors a great deal of searching.

Planning for the April 2027 Pension Change

If your estate is worth more than £500,000 as an individual, or £1 million as a couple, once your pension, home and savings are added together, the April 2027 change may give your family a tax bill you have not planned for.

I help couples and individuals work out what their estate would owe under the new rules and what can be done about it, from the order to spend savings in to gifts, trusts and the wording of a will. The inheritance tax planning service explains how I work. Call me on 020 8669 1779 or leave your details and I will call you.

Figures apply to the 2026 to 2027 tax year.