Pension Nominations and Inheritance Tax UK: How Nominations Work, IHT Impact, and What Changes in April 2027
DC pensions currently sit outside the IHT estate — making an up-to-date nomination one of the most powerful IHT tools available. From April 2027 that changes. Here is what to update now and how to plan before the rules change.
| Nomination Type | IHT Pre-April 2027 | IHT Post-April 2027 | In Probate Estate? | Best For |
|---|---|---|---|---|
| Nominate surviving spouse directly | Pension outside estate; passes to spouse tax-free; NO IHT | Pension enters estate; IHT paid; remainder to spouse (s18 spousal exemption may apply to IHT — under consultation) | NOT in probate estate (pension pays directly) | Couples wanting maximum flexibility; simplest arrangement; review pre-2027 |
| Nominate children directly | Pension outside estate; passes to children tax-free; NO IHT | Pension enters estate; IHT paid on pension; children receive net sum | NOT in probate estate | Children over 18; immediate capital to children; no IHT pre-2027 |
| Nominate the estate ('pay into my estate') | Pension DRAGGED INTO estate; IHT applies; WORST OPTION pre-2027 | Already in estate; no additional harm but no benefit | IN probate estate; delays and IHT | NEVER — always avoid nominating 'estate' as beneficiary |
| Spousal bypass trust (discretionary trust nominated) | Pension outside estate; passes to trust tax-free; trustees pay surviving spouse income/capital; pension NOT in spouse's IHT estate on second death | Pension enters estate; IHT paid; remainder to trust; trust benefits may still be outside estate on spouse's death — effectiveness reduced | NOT in probate estate; pension trustee pays death benefit to trust | Couples with large pensions where second-death IHT is a concern; review post-2027 for revised planning |
| Nominate charity | Pension outside estate; passes to charity tax-free; s23 IHTA charitable exemption and trustee discretion both apply — no IHT | Pension enters estate; charitable exemption (s23 IHTA) may remove from IHT charge for the portion to charity; may also trigger 36% rate (s36 IHTA) on rest of estate if ≥10% of baseline | NOT in probate estate; direct payment to charity | Philanthropic; reduces IHT estate; may trigger 36% rate post-2027 |
| No nomination (blank form / no form submitted) | Trustees use full discretion; pension still outside estate; may pay to persons not in deceased's wishes | Pension enters estate; trustees still have discretion over WHO receives net proceeds after IHT | NOT in probate (unless no trustees can identify beneficiaries and pension pays to estate) | ALWAYS complete a nomination — leaving it blank risks pension paying to wrong beneficiaries |
DC pension death benefits: currently outside IHT estate (trustees' discretion — not deceased's estate). Nomination form (expression of wishes): not legally binding; trustees take it seriously; update after all major life events. Avoid 'nominating estate': this drags the pension into the probate estate and IHT net. Spousal bypass trust: discretionary trust nominated as pension beneficiary; prevents death benefit from aggregating in surviving spouse's estate on second death. April 2027 reform (Budget 2024): DC pensions enter IHT estate from 6 April 2027; pension trustees responsible for calculating and paying IHT before releasing death benefits; nomination still determines who receives net proceeds; spousal exemption (s18 IHTA 1984) application to pension post-2027 — under consultation. Defined benefit (DB/final salary) pensions: different rules; death-in-service lump sums usually in trust (outside IHT); dependant's pension (income continuation) — outside estate. ISA funds at death: enter estate and are subject to IHT. Pre-2027 planning: drawdown + AIM BPR reinvestment + normal expenditure from income (s21 IHTA) + update nominations.
Pension Nominations and IHT: Complete Guide
How pension nominations work and why they are not legally binding
When you die with unspent funds in a DC pension (a SIPP, personal pension, or group DC scheme), the pension trustees decide who receives the death benefits — not your will and not the intestacy rules. The pension death benefits are held in trust for the benefit of members and their dependants; they are not part of the deceased's legal estate. Because they are not part of the estate, they pass outside probate — faster and without the 6-month delay that probate assets can face. The 'nomination form' (also called an expression of wishes, or beneficiary designation) is the document you submit to the pension trustees to tell them how you would like the death benefits distributed. The trustees are NOT legally bound to follow the nomination — it is discretionary — but in practice, a clear and up-to-date nomination is followed in the vast majority of cases. The key word is 'up-to-date': a nomination that was made 15 years ago and still names an ex-spouse as the primary beneficiary, or does not mention children born since, will be taken into account by the trustees but may not produce the intended result. Trustees must consider: the nomination form; anyone financially dependent on the deceased at the date of death; the deceased's family circumstances; the tax efficiency of the payment. A clear, comprehensive, and recently updated nomination is the best way to guide the trustees.
The IHT position of DC pensions — before April 2027
Under current law (pre-April 2027), DC pension funds sit entirely outside the IHT estate. The IHTA 1984 charges IHT on the 'transfer of value' of a 'chargeable transfer' — but pension death benefits paid under the trustees' discretion do not constitute a transfer of value by the deceased because the deceased never had the right to demand the pension funds be paid to them (they were subject to the trustees' discretion). Therefore: the full value of an unspent SIPP or personal pension at death is outside the IHT estate; it passes to the nominated beneficiaries (or at the trustees' discretion) without IHT; the person's estate is taxed on their non-pension assets only. The practical implication: holding wealth inside a SIPP is one of the most IHT-efficient strategies available. For a person with a £2m estate and a £500,000 SIPP: without pension exclusion (hypothetical): estate = £2.5m; IHT = substantial. With pension exclusion (current): taxable estate = £2m; IHT = 40% × (£2m − £500k threshold [couple]) = 40% × £1.5m = £600,000; SIPP of £500,000 passes to children tax-free. The saving = £200,000 IHT avoided. This is why financial advisers have historically recommended using the SIPP as the last asset to draw down — to preserve the IHT exclusion as long as possible.
The spousal bypass trust — pre-2027 planning with pensions
A spousal bypass trust (also called a bypass trust or discretionary death benefit trust) is a discretionary trust set up specifically to receive pension death benefits. The pension policyholder nominates the bypass trust as the beneficiary of the pension death benefits. On death: the pension trustees pay the death benefit to the bypass trust (not to the surviving spouse directly); the bypass trust trustees (often the surviving spouse AND another trustee) have discretion to pay income or capital to the surviving spouse, children, or other beneficiaries. The IHT advantage: because the pension death benefit is paid to a trust rather than directly to the surviving spouse, the pension funds do not land in the surviving spouse's estate. This prevents the pension from being aggregated in the surviving spouse's estate on the second death (which would then be taxable). Example: husband has £500,000 SIPP; nominates bypass trust; dies; pension pays to trust; wife draws income from trust during her lifetime (at trustee discretion); wife then dies; the trust assets do NOT form part of her estate (as she had no legal right to them — only a discretionary right); trust assets pass to children. Comparison: if husband nominates wife directly: wife receives £500,000 pension; wife's estate on her death = her own estate + £500,000; additional IHT = 40% × £500,000 = £200,000. Bypass trust saves £200,000 IHT on the second death. Pre-April 2027 context: this planning is well-established and effective. Post-April 2027 context: as pensions enter the IHT estate, IHT is paid on the death benefit before it reaches the bypass trust; however, the bypass trust mechanism may still prevent the NET death benefit from landing in the surviving spouse's estate — reducing IHT on the second death. Professional advice is essential for post-2027 pension planning.
April 2027 — the biggest change to pension IHT in decades
The UK government announced in Autumn Budget 2024 that from 6 April 2027, unspent DC pension funds will be included in the IHT estate for the first time. This is a fundamental change: previously, pension death benefits were outside IHT. From April 2027: the pension fund value at death will be added to the estate for IHT purposes; pension trustees will be required to calculate and pay IHT on the pension before releasing death benefits to beneficiaries; the pension remains outside the probate estate (it does not go through probate) — but IHT is charged on it. Key open questions (as of 2026): whether the spousal exemption (s18 IHTA 1984) will apply to pension death benefits paid to a spouse (i.e., IHT = £0 if pension nominated to spouse); whether the RNRB can be set against the pension value; how the 'income in respect of a deceased person' tax charge (taxed as income of the recipient when received pre-75; after death IHT + income tax interaction) will be restructured; the exact IHT reporting process for pension trustees. The legislation is expected to be finalised in Finance Act 2026/2027. Key action now: review all pension nominations and beneficiary designations; consider drawdown strategy (taking the pension now as income vs leaving it to accumulate); for large SIPPs above the NRB threshold, consider reinvesting drawdown proceeds in AIM BPR qualifying shares (100% IHT-exempt after 2yr) to convert taxable pension into IHT-exempt investment.
What to do now — pre-April 2027 pension nomination checklist
Immediate actions for pension holders concerned about IHT: (1) Update all nomination forms today: contact every pension provider; submit a new expression of wishes naming all intended beneficiaries with percentages; include contingent beneficiaries (in case the primary beneficiary predeceases); avoid nominating 'my estate' — this pulls the pension into the probate estate and IHT net even under current law. (2) Consider the spousal bypass trust: if you have a large SIPP and a surviving spouse, a bypass trust (receiving the pension death benefit) prevents the pension from aggregating in the spouse's estate on the second death; set up before death; the trust deed must be in place before the nomination is made. (3) Pension drawdown strategy: consider drawing from the SIPP strategically (especially if in a lower income tax band in early retirement) and reinvesting in AIM BPR shares — this converts the SIPP (taxable from April 2027) into AIM BPR investments (100% IHT-exempt after 2yr); alternatively, gift the pension income as PETs to children or as normal expenditure from income (s21 IHTA — uncapped, immediate IHT exemption). (4) Pension consolidation: consolidate multiple old pensions (including any defined benefit scheme accruals where commutation is possible) into a SIPP for easier management and nomination; review nomination forms on ALL schemes — old workplace pensions often have outdated nominations. (5) Re-examine the 'use the SIPP last' strategy: pre-2027, leaving the SIPP until last was IHT-optimal; post-2027, the calculus changes — drawing the pension earlier (paying income tax at a lower rate) may be better than paying IHT at 40% on the whole fund plus the recipient then paying income tax too (double taxation risk for non-spouse recipients post-2027).
Frequently Asked Questions
Do pension nominations affect inheritance tax?
Currently (pre-April 2027): DC pension death benefits are outside the IHT estate because the pension trustees (not the deceased) own and control the funds. A nomination that directs the pension to individuals (not the 'estate') keeps it outside IHT. However, nominating 'my estate' pulls the pension INTO the IHT estate — a significant and avoidable mistake. The spousal bypass trust (discretionary trust) can prevent pension death benefits from accumulating in the surviving spouse's IHT estate on the second death. From April 2027: DC pension funds will be INSIDE the IHT estate regardless of the nomination. The nomination still determines who receives the pension death benefit after IHT has been paid — so nominations remain important but their IHT-avoiding function ends after April 2027.
What is a spousal bypass trust for a pension?
A spousal bypass trust is a discretionary trust set up to receive pension death benefits instead of the surviving spouse directly. The pension policyholder nominates the bypass trust as the pension beneficiary. On death, the pension trustees pay the death benefit to the bypass trust (not to the spouse). The bypass trust trustees (often including the surviving spouse) can then pay income or capital to the spouse, children, or other named beneficiaries. The IHT advantage: the pension death benefit does NOT land in the surviving spouse's estate (they have a discretionary, not legal, right to the funds); on the surviving spouse's death, the bypass trust assets are not in the estate; this can save up to £200,000 IHT on a £500,000 pension death benefit on the second death. Post-April 2027: IHT will be charged on the pension before it reaches the bypass trust; but the bypass trust may still prevent the net proceeds from being in the surviving spouse's estate, preserving some benefit.
What happens to pensions on death after April 2027?
From 6 April 2027, unspent DC pension funds (SIPPs, personal pensions, group DC schemes) will be included in the IHT estate for the first time. Under the proposed rules: the pension fund value at death is added to the estate; IHT at 40% is calculated on the total estate (including pensions); the pension trustees will pay the IHT on the pension before releasing the death benefits to the nominated beneficiaries; the nominated beneficiaries receive the pension death benefit net of IHT. Key planning points before April 2027: (1) review nominations to avoid 'nominating the estate'; (2) consider strategic drawdown — especially if AIM BPR reinvestment or gifting (s21 IHTA) is planned; (3) spousal exemption: it is expected (but not yet confirmed) that the s18 IHTA spousal exemption will apply to pension death benefits nominated to a spouse — further legislation required.
Should I update my pension nomination form?
Yes — and you should do it now, even if you made one previously. Common nomination form problems: (1) Nominating an ex-spouse after divorce — the nomination is not automatically revoked by divorce (unlike a will under s18A Wills Act 1837); the pension trustees may still pay the ex-spouse; (2) Failing to include children born since the original nomination; (3) Nominating 'my estate' — drags the pension into the probate estate and IHT even under current law; (4) No nomination at all — trustees use full discretion; may not reflect your wishes. Submit a new expression of wishes to every pension provider: contact the pension scheme; ask for the current nomination form; complete it naming all intended beneficiaries with percentages; include contingent beneficiaries; sign, date, and return. Review annually or after any major life event (marriage, divorce, new child, death of a named beneficiary).
Is it better to draw down my pension before April 2027?
It depends on your income tax position and estate planning situation. Argument for drawing down before April 2027: (1) if you are in a lower income tax band now (e.g. basic rate 20%) than your estate will face in IHT (40%), drawing now saves tax; (2) you can reinvest the after-tax drawdown income in AIM BPR qualifying shares (100% IHT-exempt after 2yr) — converting a future IHT-exposed SIPP into an IHT-exempt portfolio; (3) you can give the pension drawdown income as normal expenditure from income (s21 IHTA) — uncapped, immediate IHT exemption, no 7-year clock. Argument against drawing down before April 2027: (1) if you are a higher or additional rate taxpayer, drawdown income is taxed at 40-45%; (2) the pension still grows tax-free inside the SIPP; (3) the April 2027 rules are not fully legislated yet — detail may change. Professional advice from a pension specialist and an IHT solicitor is recommended before making large drawdown decisions.
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