Pension Death Benefits and Inheritance Tax UK 2026: What Changes in April 2027, DC vs DB, Nomination Forms, and the Combined IHT + Income Tax Rate
DC pension funds are currently outside the IHT estate — completely IHT-free on death. That changes on 6 April 2027. For large pension holders, the combined IHT and income tax rate from April 2027 can reach 64-67%. Act before the window closes.
6 April 2027 — DC Pensions Enter the IHT Estate (Finance Act 2024)
From 6 April 2027: unused DC pension funds will be included in the IHT estate and subject to 40% IHT. The combined IHT + income tax rate for 75+ members' beneficiaries can reach ~64% (higher rate) to ~67% (additional rate). DB (defined benefit) pensions are NOT affected. Act before April 2027 — use drawdown, nomination review, and BPR/PET strategies while the current outside-estate status applies.
| Pension Type | IHT Position | Death Benefit Tax | Nomination Form |
|---|---|---|---|
| DC (Defined Contribution) Pension — Before 6 April 2027 | OUTSIDE the IHT estate. The pension fund does not form part of the deceased's estate for IHT. Death benefits paid by the trustees to nominated beneficiaries. IHT saving: full pension fund value excluded from IHT calculation. | Lump sum death benefit: if member died BEFORE age 75 → completely tax-free (s636A ITEPA 2003 — authorised lump sum paid to nominees; no income tax; no IHT). If member died AGED 75 OR OVER → income tax at the recipient's marginal rate on the lump sum received (but still outside the IHT estate). Dependant's scheme pension: ongoing pension; income tax at recipient's marginal rate. Drawdown funds passed to nominee: income tax if member died 75+. | Expression of wishes / nomination form: guides the trustees on who to pay death benefits to. The trustees are NOT legally bound by the nomination — they exercise discretion. Advantage: as pension is not part of the estate, the nomination form keeps the pension outside probate. Key: UPDATE the nomination form regularly — an outdated nomination (e.g., naming an ex-spouse) causes delays and disputes. Review after divorce, marriage, birth of children. |
| DC Pension — From 6 April 2027 (Finance Act 2024 Change) | INSIDE the IHT estate from 6 April 2027. The unused pension fund (the 'relevant pension wealth' — unspent DC fund at death) is included as an estate asset. IHT at 40% on the excess above the available NRB/RNRB. The pension scheme administrator is responsible for paying the IHT attributable to the pension (a new withholding mechanism — HMRC receives IHT from the scheme before paying death benefits). Beneficiaries receive the net death benefit after IHT is deducted. | From April 2027: IHT at 40% (on excess above NRB in the estate as a whole) PLUS income tax at the recipient's marginal rate if the member died aged 75+. COMBINED EFFECTIVE RATE: for a higher-rate taxpayer beneficiary inheriting from a member who died aged 75+: IHT 40% (reduces the fund) then income tax 40% on the net amount → effective combined rate = 40% + (60% × 40%) = 40% + 24% = 64%. For an additional rate taxpayer: 40% + (60% × 45%) = 40% + 27% = 67%. DB pensions: NOT affected — no change for defined benefit schemes. | Post-April 2027: the nomination form becomes more complex. Trustees must consider: (a) the IHT position of the estate as a whole; (b) which beneficiaries are most IHT-efficient (e.g., a surviving spouse — s18 IHTA spousal exemption — may be better as beneficiary to avoid IHT; the pension then forms part of the spouse's estate but can be drawn down tax-efficiently); (c) charitable nominations (s23 IHTA charity exemption applies — pension funds left to charity would be IHT-exempt and could contribute to the 36% rate). Review nominations urgently before April 2027. |
| DB (Defined Benefit / Final Salary) Pension | NOT brought into the IHT estate by the April 2027 change (Finance Act 2024 applies only to DC/money purchase schemes and certain hybrid schemes). DB death benefits (spouse's pension, children's pension, lump sum on death in service) remain outside the IHT estate. IHT: nil — DB death benefits are not included in the IHT400 estate calculation. | Spouse's/CP's pension: income tax at the recipient's marginal rate on ongoing pension payments (no IHT). Lump sum death in service: paid by the scheme trustees discretionarily; not part of the estate; not subject to IHT. Income tax on lump sum: if member died before age 75 → authorised lump sum tax-free (s636A ITEPA 2003); if died 75+ → income tax at recipient's marginal rate. | Expression of wishes for DB schemes: similar to DC — trustees hold discretion. DB spouse's/dependant's pensions may be automatic under scheme rules (the spouse gets 50% of the accrued pension on death — no nomination needed). Lump sum benefits: nomination form required; keeps the benefit outside the estate (discretionary payment not an estate asset). |
| Personal Pension (SIPP / SIPPS) — Pre and Post April 2027 | SIPPs (Self-Invested Personal Pensions): DC pension — same rules as DC above. Before April 2027: outside IHT estate. From April 2027: inside IHT estate. SIPPs are particularly large for higher earners (no defined benefit ceiling — fund can grow to millions). IHT impact on a £1m SIPP from April 2027: £1m × 40% IHT = £400k IHT (if the estate is above the NRB). If the SIPP member is 75+: combined rate up to 64-67% on the SIPP funds. | Same as DC above: pre-75 death → tax-free lump sum or tax-efficient nominee drawdown. Post-75 death → income tax at marginal rate PLUS (from April 2027) IHT. For SIPPs with large investment portfolios: the change is significant — a £2m SIPP in the IHT estate at 40% = £800k IHT (if above NRB after other assets). | SIPP trustees: SIPP providers act as trustees; the expression of wishes (nomination form) guides them. HMRC April 2027 proposals: the SIPP provider will calculate and withhold IHT before paying death benefits. Practical step: review the SIPP nomination form NOW; consider naming a surviving spouse (s18 IHTA — spousal exemption defers IHT to second death and allows the surviving spouse to draw down at lower rates over time). |
| Annuity Death Benefits | An annuity (purchased from an insurance company) that ceases on death: no death benefit; the annuity simply stops. Value in estate: nil (the annuity has been extinguished). A 'guaranteed period' annuity (where payments continue to the end of the guarantee period to the estate or named beneficiary): the value of remaining guaranteed payments is in the estate for IHT. A 'joint life' annuity: continues paying to the surviving spouse — no IHT (the annuity is not a transferable asset; it is a continuing income stream to the survivor, not a death benefit to the estate). | Guaranteed annuity payments to the estate or beneficiaries: income tax at the recipient's marginal rate (they are income, not capital). The April 2027 DC changes do NOT apply to annuities (annuities are insurance products, not pension funds). | For guaranteed period annuities: nominate who should receive the remaining payments. For joint life annuities: the survivor is already named in the annuity contract — no separate nomination needed. |
Pension death benefits IHT UK 2026. Current position (before 6 April 2027): DC pensions outside IHT estate; pension trustees pay death benefits at discretion to nominated beneficiaries; expression of wishes (nomination form) not legally binding on trustees; discretionary payment = not an estate asset; IHT: nil on DC pension death benefits. Finance Act 2024 (s.84 and Sch 9): from 6 April 2027, 'relevant pension wealth' (unused DC pension fund at death) included in IHT estate; pension scheme administrator responsible for withholding IHT attributable to pension (new HMRC mechanism — HMRC will bill the scheme administrator directly); death benefits paid net of IHT to beneficiaries. 'Relevant pension wealth' definition: money purchase pension funds; certain lump sum death benefits from money purchase schemes. Excluded from FA 2024 change: DB/final salary pensions (defined benefit); annuity income (paid on death from guaranteed period annuity not affected for purposes of pension reform — but lump sum DB death benefits also excluded); continuing dependant's scheme pension (income stream — excluded from relevant pension wealth definition in FA 2024 draft). ITEPA 2003 s636A: authorised lump sum death benefit — if member died before age 75: lump sum tax-free for income tax (no income tax on recipient); applies to nominees and successors; pre-75 restriction: total death benefit within the lifetime allowance (now abolished — Finance (No.2) Act 2023). If died aged 75+: lump sum taxed as income at recipient's marginal rate (s636A(2) ITEPA). Drawdown: nominee drawdown / successor drawdown — designated to nominees without annuitisation; if member died before 75: nominee's income tax-free; 75+: income tax at marginal rate. Combined rate calculation (post-April 2027, 75+ member, higher-rate beneficiary): pension fund = £P. IHT portion = £P × 40% (if above NRB); net to beneficiary = £P × 60%; income tax at 40% = £P × 60% × 40% = £P × 24%; total tax = £P × 40% + £P × 24% = £P × 64% effective. Additional rate: 40% + 60% × 45% = 40% + 27% = 67% effective. Planning strategies: (a) Draw down before death: pension income taxable at marginal income tax rate; cash invested in BPR assets (s105 IHTA — unlisted/AIM shares — IHT-free after 2yr); or gifted as PETs (s3A IHTA) — 7yr clock; or normal income exemption (s21 IHTA) if regular from income. (b) Nomination to spouse: s18 IHTA spousal exemption applies to pension death benefits designated to spouse (from April 2027 — the pension is in the estate but the spouse's share is exempt under s18); surviving spouse can draw down over time at lower income tax rates; pension then in spouse's estate at second death (further IHT planning opportunity). (c) Nomination to charity: s23 IHTA charitable exemption; pension left to charity = IHT-exempt; could also contribute to the 10% charitable legacy required for the 36% rate (s36 IHTA). (d) Pension recycling rules: if drawing down to reinvest/gift, avoid triggering the recycling rules (HMRC PTM044810) — which impose the money purchase annual allowance (MPAA = £10,000/yr) and tax charges. Seek specialist financial adviser advice. MPAA (Money Purchase Annual Allowance): £10,000/yr from April 2023; triggered when flexibly accessing a DC pension; limits further pension contributions once in drawdown. Annuities: purchased with pension fund; annuity income = income tax; annuity fund does NOT form part of DC relevant pension wealth (it has been irrevocably converted to income); April 2027 change does NOT apply to income from annuities. HMRC guidance on April 2027 change: Inheritance Tax: Pensions — Consultation and Draft Legislation (published 2024). Trustee discretion: legal position unchanged by April 2027 — trustees still pay discretionarily (nomination not binding); but IHT now withheld at source by scheme administrator.
Frequently Asked Questions
Are pension death benefits subject to inheritance tax?
Currently (before 6 April 2027): DC pension death benefits are OUTSIDE the IHT estate — the full pension fund can pass to nominated beneficiaries without IHT. From 6 April 2027 (Finance Act 2024): unused DC pension funds (and certain lump sum death benefits) will be brought INTO the IHT estate and subject to IHT at 40% on the excess above the NRB/RNRB thresholds. The pension scheme administrator will withhold the IHT before paying death benefits. DB (defined benefit/final salary) pensions are NOT affected — their death benefits remain outside the IHT estate. Act now: the window before April 2027 offers unique planning opportunities — drawing down the DC pension (and gifting or investing the proceeds in IHT-efficient assets) uses the current outside-estate status while it lasts.
What happens to my pension when I die and inheritance tax?
Before April 2027 (DC pensions): on death, the pension trustees pay the pension fund to nominated beneficiaries. If you died before age 75: the lump sum is income-tax-free and outside the IHT estate (completely tax-efficient). If you died aged 75+: income tax at the recipient's marginal rate, but still outside the IHT estate. From April 2027: the full unused DC pension fund is inside the IHT estate. The combined effect for a higher-rate taxpayer beneficiary of a 75+ member: up to 64% effective tax rate (IHT 40% + income tax 40% on the remaining 60%). DB pensions: the spouse's/dependant's pension continues to pay as income (taxable); not in the estate for IHT. Keep your nomination form up to date — an outdated nomination can cause significant delays and disputes in estate administration.
How do I reduce inheritance tax on my pension?
Current strategies (before April 2027): (1) Spend or draw down the pension — pension income drawn during your lifetime is taxed at marginal income tax rates but the cash then reduces your pension fund (which will be in the estate from April 2027). Invest the drawn-down cash in IHT-efficient assets (BPR-qualifying shares — 100% IHT relief after 2yr). (2) Gift pension income regularly — pension income gifted to children or grandchildren under the normal income exemption (s21 IHTA — if habitual, from income, not reducing standard of living) reduces the estate and pension fund simultaneously. (3) Review nominations — a surviving spouse nominated as beneficiary benefits from the s18 IHTA spousal exemption (IHT-free). The spouse can then draw down the pension at lower income tax rates over a longer period. (4) Charitable nominations — naming a charity as beneficiary for part of the pension could reduce IHT and potentially trigger the 36% reduced rate (s36 IHTA — if ≥10% of baseline goes to charity). After April 2027: the planning landscape changes significantly — specialist financial advice is essential.
What is the inheritance tax rate on pensions from April 2027?
From 6 April 2027 (Finance Act 2024): unused DC pension funds are included in the IHT estate and subject to IHT at 40% on the excess above the NRB (£325k) and RNRB (£175k) thresholds (with tNRB and tRNRB available if the deceased was widowed). The COMBINED effective tax rate for beneficiaries of a member who died aged 75+ is high: IHT at 40% reduces the pension fund; the recipient pays income tax at marginal rate on pension withdrawals — for a higher-rate taxpayer: 40% IHT + 40% income tax on the remaining 60% = effective 64%. For an additional-rate taxpayer beneficiary: 40% + (60% × 45%) = ~67%. DB pensions are NOT affected — no change to IHT treatment of defined benefit schemes. The pension scheme administrator will calculate and withhold IHT on pension death benefits before paying them to beneficiaries.
Should I draw down my pension before I die to avoid inheritance tax?
For large DC pension funds (SIPPs etc.): a drawdown strategy before April 2027 may save significant IHT. By drawing down the pension (taking pension income), you move the money from a pension (currently outside IHT estate) to your general estate (inside IHT estate). This appears counterproductive — BUT: (1) if you invest the drawn-down cash into BPR-qualifying assets (AIM shares, unlisted trading company shares — s105 IHTA), the cash becomes IHT-exempt after 2yr; (2) if you gift the drawn-down cash as PETs (to individuals — s3A IHTA), the 7yr clock starts; (3) if you spend the drawn-down cash (reducing the estate naturally), the estate reduces. Drawback: pension drawdown is taxed as income at your marginal rate — income tax is the cost of moving assets from pension to estate. Above-basic-rate taxpayers pay 40-45% income tax on drawdown. Compare: 40-45% income tax now vs 40% IHT (or 64-67% combined from April 2027) later. For most large pension holders aged 75+: accelerated drawdown into BPR assets or PETs will often be the most IHT-efficient strategy before April 2027. Specialist financial adviser advice is essential.
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