Pensions and Inheritance Tax UK 2027: Finance Act 2024 DC Pension IHT Change, When It Applies, Spousal Exemption, and Whether to Draw Down Early
From 6 April 2027, your DC pension pot will be included in your estate for IHT at 40% above the NRB. The spousal exemption still applies — but the pension then sits in the surviving spouse's estate. Early draw-down is NOT automatically the answer.
Finance Act 2024 — DC Pension IHT from 6 April 2027: Update Your Nominations NOW
The single most important immediate action: review and update your pension nominations on ALL DC pensions, SIPPs, and workplace pension schemes. A stale nomination form (naming the wrong person, or not reflecting current IHT planning) is one of the most common and costly estate planning mistakes. Then engage a chartered financial planner and IHT specialist to model your estate including pensions BEFORE April 2027.
| Aspect | Before 6 April 2027 | From 6 April 2027 | Planning Guidance |
|---|---|---|---|
| Which pensions are affected from 6 April 2027? | CURRENT IHT POSITION (BEFORE 6 APRIL 2027): all DC pension funds are outside the IHT estate: (1) Uncrystallised funds (personal pensions, SIPPs, workplace DC pots not yet drawn) — outside the estate; pass to nominated beneficiaries free of IHT. (2) Crystallised drawdown funds (flexi-access drawdown pots — money taken out of accumulation phase but not yet drawn as income) — outside the estate; pass to nominated beneficiaries free of IHT. (3) Defined benefit lump sum death benefits (if paid to a nominated beneficiary via a discretionary trust within the scheme) — may be outside the estate (subject to whether the trustees exercise discretion, removing the asset from the estate). Death before 75: beneficiary receives drawdown/lump sum from the pension free of INCOME TAX (as well as free of IHT). Death after 75: beneficiary pays income tax at their marginal rate on pension draws — but still NO IHT. This current regime made the pension the pre-eminent IHT planning vehicle for wealthy individuals — pension pots could be passed to children without IHT, with income tax payable only when drawn. | FROM 6 APRIL 2027 — WHAT IS INCLUDED: (1) Uncrystallised DC funds: the full pension pot value is included in the IHT estate on death. (2) Crystallised drawdown funds: the remaining drawdown pot is included in the IHT estate on death. (3) Serious ill health lump sums paid before 6 April 2027 under the current rules: specialist advice needed on transition. NOT INCLUDED (unchanged): (a) Annuities in payment that cease on death — no remaining capital fund; no IHT issue. (b) DB scheme pension in payment — ceases on death (spouse's pension continues if applicable, but no lump sum capital). (c) State pension — ceases on death; no capital. (d) DB lump sum death benefits from unfunded public sector schemes — separate rules. UNCERTAIN/SPECIALIST ADVICE NEEDED: Death in service lump sums (group life assurance); DB scheme discretionary death benefits; overseas pension schemes (QROPS, SIPPS with overseas investments). | The immediate planning response is NOT to automatically draw down the pension. The right response is to model the estate's IHT position WITH and WITHOUT the pension in the estate, AFTER 6 April 2027. Key variables: (a) estate size (including pension); (b) available NRB, tNRB, RNRB, tRNRB at death; (c) marginal income tax rate if drawing down; (d) whether pension passes to spouse first (exempt) then to children; (e) beneficiary's income tax position on drawing the pension later. Engage a qualified financial planner (ideally chartered financial planner — CFP) and an IHT specialist solicitor JOINTLY before making any pension draw-down decisions. Do this BEFORE the change (before April 2027) to have time to implement any planning. |
| How IHT will be collected on pensions from 6 April 2027 | CURRENT MECHANISM: pension scheme administrators do NOT pay IHT on pension death benefits (the pension is outside the estate; no IHT). The pension is simply paid to the nominated beneficiary (or the scheme trustees exercise discretion to pay the lump sum to the nominated beneficiary). No HMRC notification required by the scheme in most cases. The deceased's personal representative (executor) does not include the pension in the IHT400 calculation. The pension administrator deals with the payment of death benefits to the nominated beneficiary directly, after receiving the death certificate and relevant documentation. | FROM 6 APRIL 2027 — NEW COLLECTION MECHANISM: the pension scheme administrator will be responsible for calculating and paying the IHT attributable to the pension fund. The mechanism is expected to work as follows (based on HMRC's consultation documents): (1) The personal representative (PR/executor) reports the pension fund value to HMRC as part of the estate. (2) HMRC calculates the overall IHT on the estate (including the pension). (3) The IHT attributable to the pension fund is allocated to the pension scheme administrator. (4) The scheme administrator pays the pension-related IHT to HMRC from the pension fund. (5) The scheme pays the remaining pension (after IHT) to the nominated beneficiary. TIMELINE ISSUES: the PR must report the pension value; the scheme administrator must pay the IHT; the two parties must coordinate. This creates complexity where the pension and the rest of the estate must be settled together — the overall estate IHT rate depends on the total estate including the pension, requiring cooperation between the PR and the scheme administrator. HMRC has confirmed it will consult on the detailed mechanics before April 2027. | WHAT BENEFICIARIES AND EXECUTORS SHOULD DO NOW: (1) Ensure nomination of beneficiaries is UP TO DATE on ALL pension schemes (SIPPs, workplace pensions, old personal pensions). A nomination that was right under the old rules (e.g., nominating children to bypass estate) may need reviewing in light of the IHT change. (2) Inform pension trustees/administrators of the nominated beneficiaries to ensure the death benefit nomination is current. (3) Understand which pensions you hold: check all old and current pension schemes; find pension pots you may have forgotten. HMRC's Pension Tracing Service can help locate lost pensions. (4) Understand the estimated total estate value including all pension funds. This tells you whether the pension will be within the NRB (no IHT) or above it (40% on the excess). (5) From April 2027: when someone dies, the executor will need to co-ordinate with all pension scheme administrators — obtaining pension fund values as at the date of death, which will be included in the IHT400. |
| Spousal exemption (s18 IHTA) and pensions from 6 April 2027 | CURRENT POSITION: spousal exemption is not needed for pensions — pensions are outside the estate entirely. The pension passes to the surviving spouse (or whoever is nominated) IHT-free because there is NO IHT on the pension in the first place. The surviving spouse receives the pension pot; they can draw it as income (paying income tax at their marginal rate after age 75 if the original holder died after 75); the pension fund is NOT in the surviving spouse's estate for IHT (under current rules). This double-IHT freedom (no IHT at first death; no IHT at second death either) is why pension succession planning was highly valued. | FROM 6 APRIL 2027 — SPOUSAL EXEMPTION ON PENSIONS: if the DC pension fund passes to the SURVIVING SPOUSE or civil partner on death: the s18 IHTA spousal exemption applies. The pension fund passes IHT-free to the spouse (just as other assets pass to spouse IHT-free). SECOND DEATH ISSUE: when the surviving spouse dies: the pension fund (now in the spouse's name — by inheriting the pension or by the scheme creating a new pension for the spouse) will be in the spouse's estate for IHT. The tNRB: if the first spouse's NRB was entirely unused at their death (estate passed to spouse IHT-free including pension): the full tNRB (£325k) is transferred to the surviving spouse's estate. The surviving spouse will have: their own NRB (£325k) + tNRB (£325k) + own RNRB (£175k) + tRNRB (£175k) = up to £1m combined NRB/RNRB. The pension fund on the surviving spouse's death will be within the estate, potentially charged to IHT above £1m. CHILDREN: if the pension nominates children (rather than spouse): IHT applies on the first death (no spousal exemption). The IHT is paid by the scheme on the pension attributable to the children's share. This is the planning decision: leave the pension to spouse (IHT-free now; in spouse's estate at second death) or leave to children (IHT at first death; but income tax savings for children later). | PENSION NOMINATION PLANNING — KEY DECISIONS POST-FA 2024: (1) LEAVE TO SURVIVING SPOUSE: pension to spouse = IHT-free at first death (s18 exempt); pension in spouse's estate at second death (potentially up to £1m NRB/RNRB available, so may still be IHT-efficient if pension + estate is under £1m). (2) LEAVE TO CHILDREN DIRECTLY: pension to children = IHT at first death (40% above NRB); but children receive the pension free of income tax if the holder died before 75; after 75 they pay income tax on draws. The IHT at first death 'uses up' the NRB/RNRB for the pension, potentially freeing up those allowances for the rest of the estate. (3) SPLIT NOMINATION: split the pension between spouse and children (proportion to be determined by financial planning modelling). (4) THE TOPPING-UP QUESTION: some individuals may find it MORE tax-efficient to take the pension (income tax now at marginal rate) and give the net amount to children as a PET (IHT-free if surviving 7yr) — this avoids the pension being in the estate at all. Again: model the numbers with a financial planner before deciding. |
| Defined benefit pensions and death in service from 6 April 2027 | CURRENT POSITION FOR DB PENSIONS AND DEATH IN SERVICE: (1) DEFINED BENEFIT pension in payment: on the death of a DB pensioner, the pension (the income stream) ceases — the surviving spouse receives a spouse's pension (a continuing income stream — not a lump sum capital value). No lump sum passes to the estate. The spouse's pension is income, not capital — no IHT. (2) DEATH BEFORE RETIREMENT (DB): on the death of an active member of a DB scheme before retirement: a lump sum (2× or 4× salary, for example, depending on scheme rules) may be paid by the scheme. These lump sums are typically held in a discretionary trust by the scheme trustees — paid at the trustees' discretion to the nominated person. Because the trustees exercise discretion: the lump sum is NOT in the estate (no IHT). This is the current position. (3) DEATH IN SERVICE (group life assurance): typically also held in a trust (employer's group life assurance written in trust) — trustees exercise discretion to pay the nominated beneficiary. Not in the estate. No IHT currently. | FROM 6 APRIL 2027 — DB DEATH BENEFITS: the FA 2024 change targets DC pension FUNDS (the accumulation pot). The position for DB schemes (the income stream and discretionary lump sums) is more complex and has been subject to consultation: PENSION INCOME STREAMS: a DB pension in payment that provides a spouse's pension — no capital value; no IHT issue. The ongoing pension income to the surviving spouse is taxable income, not an estate asset. DISCRETIONARY LUMP SUMS: HMRC's consultation suggested that discretionary lump sums paid by DB scheme trustees (death in service benefits, scheme death gratuities) paid to nominated beneficiaries from a discretionary trust held by the scheme may remain outside the estate — because the deceased never had a 'right' to the lump sum (the trustees had discretion). HOWEVER: the rules for DB lump sums post-April 2027 have NOT yet been definitively settled — specialist advice and monitoring of HMRC's final regulations is essential. | PRACTICAL STEPS FOR DB MEMBERS AND DEATH IN SERVICE: (1) Review your nomination form for ALL pension schemes (DB and DC) and group life assurance — keep nominations up to date. A stale or wrong nomination can cause IHT exposure or the wrong person receiving the benefit. (2) Understand which type of scheme each pension is: DC (accumulation pot — affected from 2027) vs DB (income stream — less directly affected). (3) For DC workplace pensions (many modern workplace pensions are DC): the full pot value is within the new IHT regime from April 2027. (4) For mixed workplace schemes (DB accruals before a certain date + DC contributions after): separate treatment — specialist advice needed to separate the DB and DC components for IHT planning. (5) Monitor HMRC's final guidance and regulations — final details for the April 2027 change have NOT all been published at the date of writing. Check HMRC's pension IHT guidance pages when they are published. |
| Should you draw down your pension early to avoid IHT from 2027? | WHY PEOPLE ARE CONSIDERING EARLY DRAW-DOWN: if the DC pension will be subject to IHT at 40% (above the NRB) from 6 April 2027: some individuals are tempted to draw the pension down before the change and gift the net proceeds to their children (as a PET). The logic: if you gift the money to children now and survive 7yr: no IHT. But you pay income tax on the withdrawal now (at your marginal rate). THE MATHEMATICS: if you draw down at 40% income tax (higher rate taxpayer) and the IHT that would have applied is also 40%: the net amount reaching your children is broadly the same — 60p in the £ whether you draw down (pay income tax) or the pension stays in (IHT applies). However: the NRB reduces the IHT on the pension (so the effective IHT rate is less than 40% for most people). And income tax on the withdrawal may push you into higher rates. BASIC RATE TAXPAYER: drawing at 20% income tax now vs 40% IHT later: the draw-down looks better — BUT the pension is being reduced by income tax today whereas it could have grown IHT-free and the 40% IHT only applies to whatever remains at death. The longer you live: the more the pension grows; the more expensive the draw-down was. COMPLEX INTERACTION: this is not a simple tax comparison — it requires modelling the specific estate size, marginal rates, life expectancy, and income needs. A chartered financial planner and IHT solicitor should model the numbers before any action. | WHAT DRAW-DOWN ACTUALLY COSTS — KEY NUMBERS: (1) You have a £500k SIPP. You are a 45% taxpayer. Draw-down: £500k withdrawn = £375k AFTER income tax (taking the 25% TFLS tax-free = £125k; then 45% tax on £375k = £169k tax = £206k net + £125k TFLS = £331k to children). Alternatively: pension in estate at death (assuming NRB of £325k already used): IHT 40% × £500k = £200k IHT; children receive £300k. So in this simplified example: draw-down + gift GIVES £331k (but 7yr wait and PET); leaving in pension GIVES £300k at death (no wait). Difference: £31k in children's hands if you live 7yr. But: if NRB not fully used: the IHT on the £500k pension is less than £200k (NRB shelter). And: if marginal rate is 40% (not 45%): draw-down is better. The numbers are very sensitive to the specific facts. (2) Do NOT draw down without running the numbers with a qualified financial planner. | ALTERNATIVES TO EARLY DRAW-DOWN: (1) PRIORITISE SPENDING THE PENSION FIRST: if you need to fund retirement income, spend the pension first (draw the minimum you need each year) — this reduces the pension pot that will be subject to IHT; you spend what you need; children inherit the estate assets (house, ISAs, investments) which may have a lower IHT charge (e.g., RNRB applies to the house). (2) USE THE TFLS FIRST (25% TAX-FREE CASH): up to £268,275 can be taken tax-free (Lifetime Allowance-derived TFLS limit — seek advice on this). The TFLS can be gifted to children as a PET. (3) CONTINUE MAKING PENSION CONTRIBUTIONS: the pension contribution rules (annual allowance £60k; carry-forward) remain as before — the pension is still IHT-efficient for accumulation (no IHT in the pot while it grows). After 6 April 2027: the IHT applies on death, not on growth — the pension can still grow IHT-free during life. (4) THE 7-YEAR PET STRATEGY: gift out of the pension gradually (within the lower rate bands; using carry-forward) + gift the net proceeds to children + survive 7yr. This takes time and requires careful planning. (5) CHARITABLE LEGACY: gifts to charity from the pension (or the estate funded by the pension) remain IHT-free. The 36% reduced rate (s36 IHTA) may also apply. |
Pensions and IHT UK 2027. Finance Act 2024 Schedule 34: the Inheritance Tax treatment of pension funds — amendments to IHTA 1984 to bring unspent DC pension funds within the scope of IHT from 6 April 2027. Pre-6 April 2027: the IHT treatment of pensions — a DC pension fund nominated to a beneficiary was not included in the deceased's estate for IHT because the fund was held by the pension trustees under a discretionary trust; the pension scheme trustees paid the death benefits to the nominated beneficiary at their discretion; the deceased had no right to demand the payment (it was the trustees' discretion) — therefore the fund was not 'beneficially entitled' to the deceased and was not in their estate under s5 IHTA 1984. The omission of this IHT-free 'wrapper' made the pension the primary estate planning vehicle for those who could afford to delay pension access — allowing the pension to grow tax-free and pass IHT-free to nominated beneficiaries. From 6 April 2027 — FA 2024 Sch 34: the DC pension fund will be treated as part of the estate for IHT. The mechanism: the pension scheme administrator (the pension trustees or insurance company running the scheme) will receive a notification from HMRC of the IHT due on the pension element of the estate. The scheme administrator will deduct the IHT from the pension fund before paying the balance to the nominated beneficiary. The deceased's personal representative (executor) must include all DC pension funds in the IHT400 (the IHT return on death). The PR must coordinate with all pension scheme administrators to obtain the fund values at the date of death and the IHT attributable to each pension. Finance Act 2024 Sch 34 also provides for: (a) the scheme administrator to be jointly and severally liable for the IHT along with the PR; (b) interest on late-paid pension IHT; (c) penalties for non-compliance. Spousal exemption (s18 IHTA 1984): where the DC pension is nominated to a surviving spouse or civil partner: the spousal exemption applies; the pension passes IHT-free. The surviving spouse may 'inherit' the pension by being admitted to the scheme or by receiving a new pension in their own name. This pension is then in the surviving spouse's estate for IHT on THEIR death. The tNRB (s8A IHTA — transferred nil-rate band) is available at the second death: the first spouse's unused NRB (the NRB not used at their death because everything passed to the spouse IHT-free) is transferred and added to the surviving spouse's own NRB. For the pension election to the surviving spouse under the new rules: check whether the pension scheme can process a 'spousal continuation' or whether the spouse takes a lump sum (taxable if first death was after age 75). DC pension definitions: a 'defined contribution' pension is any pension where the retirement income depends on the accumulated contributions and investment growth in the member's individual 'pot'. This includes: personal pensions; self-invested personal pensions (SIPPs); workplace pensions that are not DB (the majority of modern workplace pensions). Annual allowance for pension contributions: £60,000 per year (or 100% of earned income if lower); the money purchase annual allowance (MPAA) of £10,000 applies after taking flexible income from a DC pension. Pension lifetime allowance: abolished from April 2024. The Lump Sum Allowance is £268,275 (tax-free cash). The pension IHT change does not affect the annual allowance or MPAA — contributions can still be made. But after 6 April 2027: pensions no longer function as IHT-free wrappers on death, reducing the incentive for extreme 'pension maximisation' as an IHT strategy. HMRC consultation documents on the pension IHT change: published August 2024 ('Inheritance Tax on pension funds') and subsequent technical notes. Final legislation included in Finance Act 2024. Detailed HMRC guidance on the mechanics of collection (IHT100 variations; scheme administrator notification; joint liability) expected before April 2027 — monitor HMRC's pension IHT guidance pages for updates.
Frequently Asked Questions
When will pensions be subject to inheritance tax in the UK?
Finance Act 2024 (Schedule 34) will bring defined contribution (DC) pension funds into the IHT estate from 6 APRIL 2027. Before that date: DC pension funds (SIPPs, personal pensions, workplace DC scheme pots) are OUTSIDE the IHT estate and pass to nominated beneficiaries free of IHT. From 6 April 2027: uncrystallised and flexi-access drawdown DC pension funds will be treated as part of the estate for IHT at 40% above the available NRB. Pension scheme administrators will be responsible for paying the IHT from the pension fund before distributing the remainder to beneficiaries. Annuities in payment (which cease on death) and DB pension income are NOT affected in the same way. Specialist advice is essential — HMRC has not yet published all the final regulations.
If I leave my pension to my spouse, is it exempt from IHT from 2027?
Yes — the s18 IHTA spousal exemption will apply to pensions from 6 April 2027 in the same way as other estate assets. If the DC pension passes to a surviving spouse or civil partner: the pension passes IHT-FREE (s18 IHTA unlimited spouse exemption). However: the surviving spouse then has the pension in THEIR OWN estate. When the surviving spouse dies: the pension (now in their name) will be included in their estate for IHT. The tNRB (transferred NRB from the first spouse's estate — up to £325k) will be available to the surviving spouse: total NRB + tNRB + RNRB + tRNRB = up to £1m combined. Planning: if the pension + rest of estate is under £1m on the second death: no IHT. If over £1m: 40% IHT on the excess. Review pension nominations jointly with your overall estate IHT position.
Should I draw down my pension early to avoid the 2027 IHT change?
Not automatically — the maths are complex. Drawing down the pension early means paying INCOME TAX at your marginal rate (20%, 40%, or 45%) on the amount withdrawn (beyond the 25% tax-free cash). If you then gift the net proceeds to children: the gift is a PET (survive 7yr to be IHT-free). Comparison: 40% income tax today vs 40% IHT at death — broadly equal; but the pension also benefits from growth during life, and the NRB reduces the IHT on death (so the effective IHT rate on the pension may be less than 40%). The answer depends on: your marginal income tax rate; your estate size vs NRB; how long you are likely to live; what your income needs are; and the beneficiary's income tax position on drawing the pension later. A CHARTERED FINANCIAL PLANNER and IHT specialist solicitor should model your specific situation before any draw-down. Early draw-down is NOT always the right answer.
Are defined benefit pensions affected by the 2027 IHT change?
Not in the same way as DC pensions. A defined benefit (final salary or career average) pension in payment: ceases on the pensioner's death (a surviving spouse may receive a spouse's pension — an income stream, not a capital lump sum). No capital value passes to the estate; no IHT issue on the ongoing pension income. DB lump sum death benefits (paid on death before retirement): are typically paid by the scheme trustees at their discretion to the nominated beneficiary — NOT in the estate (discretionary payment by trustees, not a right of the estate). Death in service (group life assurance): usually written in trust — trustees' discretion; not in the estate. HOWEVER: the rules for DB scheme death benefits after April 2027 have NOT been definitively published — HMRC's consultation is ongoing. Specialist advice is essential for DB scheme members, especially for complex or hybrid schemes.
What is the best thing to do with my pension to plan for the 2027 IHT change?
There is no single 'best' answer — it depends on your estate size, tax rates, and objectives. However, key actions to consider NOW (before April 2027): (1) UPDATE PENSION NOMINATIONS on all DC pensions (SIPPs, workplace pensions, personal pensions) — ensure the nominations reflect your current wishes and IHT planning. (2) GET A WHOLE-OF-ESTATE IHT REVIEW: calculate your total estate value including ALL pension funds. Understand your combined NRB/RNRB. (3) ENGAGE A CHARTERED FINANCIAL PLANNER and IHT solicitor to model your specific position — draw-down vs stay invested; spouse nomination vs children nomination; PET strategy. (4) CONSIDER PRIORITISING SPENDING THE PENSION: if you need retirement income, draw the pension first and spend it on living costs — this reduces the taxable pension pot while preserving non-pension assets (house, ISAs) for children with different IHT treatment (RNRB on the home). (5) CHARITABLE LEGACY PLANNING: gifts to charity from the estate reduce IHT and may trigger the 36% reduced rate (s36 IHTA) if ≥10% of the estate goes to charity.
Your Will Needs to Reflect the New Pension IHT Rules — Before April 2027
Pension nominations, will provisions for surviving spouses, and the overall estate IHT plan all need reviewing before the April 2027 change. WillSafe will kits from £39.99.
View Will Kits from £39.99