Pension Death Benefits and IHT from April 2027: What Changes and What to Do Now
Unspent pension funds — currently outside the estate and free of IHT entirely — are proposed to be brought within the IHT charge from April 2027. For many people with large pension pots, this is the biggest IHT change in decades. The spousal exemption is preserved, but pensions passing to children or other non-spouse beneficiaries will face 40% tax above the available NRB.
Current Position vs Proposed Change
Current position (pre-April 2027)
Pension funds (defined contribution) and lump sum death benefits from defined benefit schemes held under discretionary trust are outside the deceased's estate for IHT. The pension trustees pay the death benefit directly to nominated beneficiaries — the estate pays no IHT on the pension fund. This has made pensions the most IHT-efficient asset class: many advisers recommended leaving the pension untouched and drawing on other assets first.
Proposed position from April 2027
The pension fund (the 'remaining uncrystallised funds' and any unused drawdown pot) is to be included in the deceased's estate for IHT purposes. The scheme administrator will be required to report the pension fund value to HMRC and to pay the IHT due on the pension before releasing the balance to the nominated beneficiaries. The estate will still pass through IHT in the usual way — but now with the pension fund added to the chargeable estate. The spousal exemption is preserved: pension funds passing to a surviving spouse or civil partner remain IHT-free.
Which pensions are affected
The proposal covers: defined contribution (money purchase) pensions, including SIPPs, personal pensions, and workplace defined contribution schemes; unused drawdown funds in flexi-access drawdown; and lump sum death in service benefits from defined benefit (final salary) pension schemes that are held under a discretionary trust and paid on the member's death. Not affected: annuities (no residual value on death); scheme pensions already in payment from a DB scheme (these cease on death); and any pension benefits already crystallised into an annuity or pension in payment. The exact scope will be confirmed in legislation.
How the IHT will be calculated and collected
From April 2027, the scheme administrator (pension provider or trustees) will be responsible for calculating the IHT on the pension fund, paying it to HMRC, and then releasing the net balance to the nominated beneficiaries. The pension fund is added to the rest of the taxable estate. The NRB (and any available transferable NRB, RNRB) is applied across the combined estate and pension fund. IHT at 40% applies to the excess. The pension provider must obtain the IHT calculation from the executors/personal representatives to ensure the correct amount is deducted. The mechanics of collection (especially for large estates where the pension is one of many assets) are still being developed through HMRC consultation.
Frequently Asked Questions
Will the spousal exemption apply to pension death benefits after April 2027?
Yes — under the proposed rules, the spousal exemption will continue to apply where the pension fund passes to a surviving spouse or civil partner. This means: on the first death, the pension fund included in the estate qualifies for the spousal exemption (like other estate assets), so no IHT is due on the pension on the first death if it passes to the surviving spouse. On the second death (the surviving spouse's death), the pension fund (if still unspent) will be in the surviving spouse's estate and subject to IHT at that point — applying the available NRB, RNRB, and any other reliefs. The change in 2027 therefore has its greatest impact on pensions that pass to non-spouse beneficiaries (children, grandchildren, other family) on death.
How does the April 2027 change affect pension drawdown strategy?
Before April 2027, it made IHT sense to draw on ISAs, savings, and other estate assets first — keeping the pension untouched so it could pass outside the estate IHT-free to beneficiaries. From April 2027, the pension is in the estate anyway — so the strategic advantage of preserving the pension (vs drawing it down) is significantly reduced. Post-2027 drawdown strategy will focus on: (1) drawing down from the pension at marginal income tax rates during life (if this is lower than the IHT rate of 40% on death); (2) gifting drawn-down proceeds as PETs or CLTs to start the 7-year clock; (3) using pension drawdown to fund gifts that would otherwise be funded from estate assets. However, the pension remains income-tax-free on growth during the member's lifetime — so it is still the most tax-efficient vehicle for long-term investment. The 2027 change reduces the IHT advantage at death but does not affect the income tax efficiency during life.
What planning steps should people with large pension pots take before April 2027?
Key planning actions: (1) Review nominations — ensure your expression of wishes/nomination of beneficiaries is current and names the right people. From 2027, the pension will be taxed in the estate, but the identity of the beneficiary (spouse vs non-spouse) still determines whether the spousal exemption applies. (2) Model the post-2027 IHT position — understand how much IHT your estate will face with the pension included. Large pension pots (above the NRB after using other assets) will face significant IHT. (3) Consider accelerated drawdown — drawdown at marginal income tax rates before April 2027 may be preferable to leaving the full fund exposed to 40% IHT on death. (4) Consider making gifts from drawn-down funds — starting PETs now extends the 7-year clock before 2027. (5) Review life cover — if the IHT position worsens in 2027, additional life cover (written in trust to pay the IHT bill) may be appropriate. (6) Seek specialist pension and IHT advice — the interaction of the proposed changes with existing estate plans is complex and fact-specific.
Does the proposed change affect defined benefit (final salary) pension schemes?
Defined benefit lump sum death benefits (paid as a lump sum from a DB scheme on the member's death before retirement, or as a return of contributions/commutation on early death in service) are included in the proposed 2027 change — to the extent they are paid as a lump sum under discretionary trust (i.e. the pension trustees decide who receives the lump sum). The ongoing scheme pension (paid to a spouse or dependant as a continuing pension after the member's death) is NOT included — these are income streams, not a lump sum capital death benefit. For DB members who die in service or before taking benefits, the potential lump sum death benefit (often 2–4× salary) will be included in the estate from 2027. This is a significant change for public sector workers and others with large DB lump sum death benefits.
How does the pension IHT change interact with the £2.5m BPR/APR cap from April 2026?
The proposed pension IHT change (April 2027) and the BPR/APR cap change (April 2026) are separate — they address different assets. The BPR/APR cap limits the 100% relief on qualifying business and agricultural property to £2.5m per individual. The pension IHT change brings unspent pensions into the estate. For business owners or farmers who also have substantial pension pots, both changes will apply — compounding the IHT exposure. A farmer with a £2m agricultural estate, £500,000 of pension savings, and a £1m farm exceeding the APR cap (£500,000 above the £2.5m cap) will face IHT on: the farm excess (£500,000 × 20% = £100,000), the pension (subject to available NRB), and any other estate assets. Modelling the combined impact of both changes is now a priority for business owners and farmers with significant pension pots.
Will the existing discretionary trust structure for pension death benefits still keep the pension outside the estate?
No — the proposed April 2027 change specifically targets lump sum pension death benefits paid via discretionary trust. The reason pensions are currently outside the estate is precisely because they are held under discretionary trust (the trustees decide who receives the money, so the deceased has no binding entitlement). The 2027 change creates a new IHT charge that applies notwithstanding the discretionary trust structure — overriding the reason why pensions have been estate-efficient. The scheme trustees will be required to report the pension value and withhold IHT before paying the nominated beneficiary. The expression of wishes / nomination still determines who receives the net-of-tax proceeds — but does not shelter the pension from the IHT charge itself.
Is Your Will Ready for the 2027 Pension Change?
The April 2027 change means your pension is now part of your IHT planning. Your will, your pension nomination, and your overall estate plan need to work together. Start with a WillSafe will kit — and review your pension nominations urgently.
View Will Kits from £39.99