Inheritance Tax on Pensions UK: How Budget 2024 Changes SIPP and Pension IHT from April 2027
Until 5 April 2027: pension funds are outside the IHT estate — nominated beneficiaries receive them free of IHT regardless of estate size. From 6 April 2027 (Budget 2024): unspent pension funds enter the IHT estate at 40% above the threshold. A £400,000 SIPP in a £600,000 estate currently pays £0 IHT on the pension — from April 2027, it pays £160,000. Act now.
| Pension / Death Benefit Type | In IHT Estate (until Apr 2027)? | In IHT Estate (from Apr 2027)? | Notes |
|---|---|---|---|
| SIPP (unspent fund) | No — outside estate | Yes — full fund value in estate | Pension trustees pay IHT; residual fund to nominees |
| Personal pension (defined contribution) | No — outside estate | Yes — in estate from 2027 | Nomination/expression of wishes still critical |
| Workplace DC pension (money purchase) | No — outside estate | Yes — in estate from 2027 | Check scheme rules for lump sum vs drawdown treatment |
| Flexi-access drawdown fund | No — outside estate | Yes — unspent drawdown in estate | Drawdown income received before death is in estate as cash |
| Pension annuity (no guarantee period) | No — fund used up | No — fund used up | Annuity ceases on death; no residual fund to inherit |
| Defined benefit (final salary) pension | No — not a fund | No — spouses pension/lump sum rules unchanged | DB schemes pay spouse's pension; lump sum = discretionary trust |
| State pension | No — no fund | No — no fund | Income not a capital sum; nothing passes on death |
| Death-in-service lump sum (group life) | No — outside estate (discretionary trust) | No — unaffected by April 2027 change | Separate from pension — discretionary trust payment |
Budget 2024 — Finance Act 2025. DC pension IHT reform effective 6 April 2027. Pension trustees responsible for calculating and paying IHT on pension portion. Draft regulations expected before implementation. State pension: income only — no fund, no IHT.
Inheritance Tax on Pensions: Complete Guide
How pensions work for IHT before 6 April 2027
Until 5 April 2027, unspent pension funds in defined contribution schemes (SIPPs, personal pensions, group personal pensions, stakeholder pensions) sit outside the IHT estate. This is because pension funds are held by trustees who make a discretionary payment to nominated beneficiaries — the fund is never legally owned by the deceased member at death. It does not pass under the will or the intestacy rules. The practical result: regardless of how large the pension pot, it does not increase the IHT bill. An estate of £500,000 with a £2,000,000 SIPP currently pays £0 IHT on the pension fund. The nominated beneficiaries receive the pension fund directly from the pension trustees, free of IHT. This has made pension funds one of the most powerful IHT planning tools available — many financial advisers have recommended drawing down other assets first during retirement, leaving the pension untouched to pass IHT-free on death. This strategy will become much less effective from April 2027.
The Budget 2024 change: pensions enter the estate from 6 April 2027
In the Autumn Budget of October 2024, the Chancellor announced that unspent defined contribution pension funds will be included in the deceased's IHT estate from 6 April 2027. This is a fundamental change. From 6 April 2027: (1) The value of the unspent pension fund at death is added to the IHT estate along with all other assets; (2) IHT at 40% (or 36% if 10%+ to charity) applies to the total estate above the threshold; (3) The pension trustees will be responsible for paying the IHT attributable to the pension fund before paying the residual fund to the nominated beneficiaries — the beneficiaries receive the pension fund minus the IHT; (4) The pension fund may still be subject to income tax on withdrawals (for death after age 75 — income tax applies to withdrawals by the beneficiary). This means pension funds after April 2027 could face a double tax hit: 40% IHT on the pension at death, then income tax on withdrawals by the beneficiary. The effective combined rate can exceed 60% in higher-rate taxpayer hands. The government has consulted on the mechanics (how pension trustees calculate and pay IHT, how the thresholds apply where the estate + pension spans the NRB boundary) with draft regulations expected before April 2027.
What types of pension are affected
The April 2027 change affects defined contribution (money purchase) pension schemes — specifically the unspent fund that remains in the pension at death: (1) SIPPs (Self-Invested Personal Pensions): fully affected — the fund value at death enters the IHT estate; (2) Personal pensions and group personal pensions: affected; (3) Workplace defined contribution pensions (money purchase): affected; (4) Pension drawdown funds (flexi-access drawdown): the unspent drawdown fund affected. Not affected (or differently affected): (5) Defined benefit (final salary) pensions: most DB schemes pay a spouse's pension on death and a lump sum (death-in-service benefit) — these are typically outside the estate already (paid at trustee discretion). Defined benefit schemes do not accumulate a pot in the same way. The April 2027 rules apply primarily to DC schemes with unspent funds; (6) State pension: there is no pension pot — the state pension is income, not a capital sum. Nothing passes to beneficiaries. No IHT; (7) Annuities: once a pension fund has been used to purchase an annuity, there is no remaining fund. Guaranteed annuity payments (protecting payments for a fixed term) are not affected; (8) Death-in-service lump sums (group life assurance): these are not pension funds — they are held in discretionary trusts outside the estate and are unaffected by the April 2027 change.
What to do before April 2027 — immediate planning
The window before April 2027 provides specific planning opportunities: (1) Calculate total estate including pension: add the current pension fund value to the non-pension estate. If the combined total exceeds the available IHT threshold (£325,000 + £175,000 RNRB = £500,000 per person; £1,000,000 per couple), IHT will apply from 2027 and action may be needed; (2) Update pension nominations now: the nomination of beneficiaries form (expression of wishes) remains important after 2027 — it determines who receives the fund (even if IHT applies, the right people should still receive it). Named charities nominated for a share of the pension will benefit from the pension being exempt from IHT (charitable exemption s23 IHTA 1984) and may trigger the 36% reduced IHT rate on the rest of the estate; (3) Draw down pension strategically: consider taking pension income to fund spending, leaving non-pension assets (property, cash, investments) for lifetime gifting. The pension was the last IHT-efficient fund — from 2027, the strategy reverses: spend down the pension and gift other assets as PETs; (4) Reinvest pension drawdown into AIM BPR shares: pension income drawn down can be reinvested into AIM BPR qualifying shares. After 2 years, these are 100% IHT-exempt (up to the £1m combined BPR/APR cap from April 2026). This effectively replaces the pension's IHT efficiency; (5) Pension contributions for income tax relief: making pension contributions still attracts income tax relief at 20-45% — even if the fund will be IHT-taxed at 40% on death, the upfront income tax relief (especially for additional-rate taxpayers at 45%) can still make contributions worthwhile on balance.
Pension nominations, spousal bypass trusts, and beneficiary planning
Nomination of beneficiaries (expression of wishes): the nominated beneficiary form tells the pension trustees who you want to receive the death benefits. After April 2027, nominations remain critical — they determine who receives the fund (net of IHT) and whether any charitable nomination reduces the IHT. All nominations should be reviewed: (1) Are the correct people nominated? (2) Is a charity nominated for a portion? (3) Has the expression of wishes been updated after divorce, remarriage, or children being born? Spousal bypass trust: a pension death benefit trust (spousal bypass trust) allows the deceased's pension to be paid to a discretionary trust for the benefit of the surviving spouse, children, and others — rather than directly to the surviving spouse. By paying into a trust rather than to the survivor directly, the pension death benefits avoid inflating the surviving spouse's estate. The pension fund is held in the trust outside the survivor's estate. After April 2027, the initial IHT on the pension may apply on the first death, but the trust structure prevents the fund from being taxed again on the survivor's death. Many pension schemes offer their own discretionary trust; financial advisers can establish a standalone pension trust. Note: the IHT on the pension on first death (from April 2027) is charged regardless of whether a bypass trust or direct payment is used — the bypass trust's benefit is avoiding the second estate tax on the survivor's death.
Frequently Asked Questions
Are pensions subject to inheritance tax in the UK?
Currently (until 5 April 2027): No — unspent defined contribution pension funds (SIPPs, personal pensions, defined contribution workplace schemes) are outside the IHT estate. They pass to nominated beneficiaries free of IHT. From 6 April 2027 (Budget 2024): Yes — unspent pension funds enter the IHT estate and are subject to 40% IHT above the threshold. State pension: no fund exists — it is income, not a capital sum, and nothing passes on death.
When do pensions become subject to inheritance tax?
From 6 April 2027 — this was announced in the Autumn Budget of October 2024. Unspent defined contribution pension funds (SIPPs, personal pensions, drawdown funds) will be included in the deceased's IHT estate from this date. Estates where death occurs on or before 5 April 2027 are not affected — the pension remains outside the estate.
Is a SIPP included in inheritance tax?
Until 5 April 2027: No — a SIPP's unspent fund is outside the IHT estate. Nominated beneficiaries receive the fund free of IHT. From 6 April 2027: Yes — the SIPP value at death is included in the IHT estate. The pension trustees pay the IHT attributable to the pension before paying the residual fund to nominees. If the beneficiary withdraws income from a SIPP inherited after age 75, income tax also applies — creating a potential combined tax rate above 60%.
What happens to a pension when someone dies — is it part of the estate?
Until 5 April 2027: pension death benefits are paid by the pension trustees at their discretion to nominated beneficiaries — outside the estate, no IHT. From 6 April 2027: the unspent pension fund is added to the estate for IHT. The pension trustees will be responsible for paying the IHT on the pension portion. The beneficiaries then receive the fund net of IHT. State pension: no fund — it is not part of the estate. Defined benefit pension death lump sums: typically outside the estate as discretionary trust payments.
What should I do about my pension and inheritance tax before April 2027?
Key actions before 6 April 2027: (1) Calculate your total estate including pension — if combined total exceeds your threshold (£500,000 single, £1m couple), IHT will apply to the pension from 2027; (2) Update your pension nomination/expression of wishes — include charities if charitable legacy fits your plans; (3) Consider strategic drawdown — spend pension now and gift non-pension assets as PETs to children; (4) Reinvest pension income into AIM BPR qualifying shares (100% IHT-exempt after 2 years, up to £1m cap); (5) Set up or review a spousal bypass trust for pension death benefits — avoids the fund being taxed on the survivor's death too; (6) Review whole-of-life insurance in trust — to fund the IHT bill that will arise from the pension from 2027.
Update Your Will and Pension Nominations Before April 2027
The Budget 2024 pension reform changes the IHT equation fundamentally. Update your will to ensure the RNRB is claimed on the home, review pension nominations, and consider leaving a charitable share of the pension. WillSafe will kits for England and Wales provide the legal starting point.
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