Pension Death Benefits and IHT UK 2026: What Happens to Your Pension?

Updated: 16 May 2026 • Reading time: 8 min

For decades, pensions have been one of the most tax-efficient assets to pass to the next generation — sitting outside the IHT estate and passing free of inheritance tax. That is about to change. The Government’s October 2024 Budget announced that unused pension funds and death benefits will be brought within the IHT estate from April 2027, fundamentally reshaping pension estate planning. Understanding the current rules — and what is coming — is critical for anyone with significant pension savings.

How Pension Death Benefits Work: The Basics

Most defined contribution (DC) pensions — including personal pensions, SIPPs, and workplace DC schemes — do not form part of the member’s estate on death. Instead, the pension fund is held by the scheme trustees, who have discretion to pay death benefits to persons nominated by the member (or, failing nomination, to the trustees’ choice of dependants and beneficiaries).

Because the pension is not part of the estate:

• It does not pass under the member’s will
• It is not subject to probate
• It has historically been outside the IHT net (changing from April 2027)
• The pension is not available to the member’s creditors in most cases

Nominations: Expression of Wishes

The mechanism for directing who receives your pension on death is the nomination of beneficiaries form — also called an expression of wishes. This is a form lodged with the pension provider specifying who you want to receive the fund. The trustees have discretion — they are not legally bound to follow it — but in practice they almost always do where the nomination is clear and up to date.

You can nominate:

• Your spouse or civil partner
• Children or other dependants
• Adult children or other named individuals who are not dependants
• A trust (to keep the funds outside beneficiaries’ own estates)
• A charity

You can specify percentages between multiple nominees. The nomination should be updated whenever your family circumstances change — particularly after divorce, remarriage, or the death of a nominated person.

Income Tax Changes from April 2024

From 6 April 2024, lump sum death benefits paid from a pension where the member died before age 75 are no longer exempt from income tax. Previously, these were completely tax-free to the recipient. Now, the recipient pays income tax at their marginal rate on the lump sum received. This applies to:

• Uncrystallised funds lump sum death benefits
• Drawdown fund lump sum death benefits
• Annuity protection lump sums

Benefits designated into a drawdown arrangement for the beneficiary (rather than paid as a lump sum) may still allow the beneficiary to draw income at a time of their choosing, potentially managing the income tax position over time.

The April 2027 IHT Change: What We Know

The Government announced in the October 2024 Budget that from 6 April 2027:

• Unused pension funds and pension death benefits will be included within the member’s estate for IHT purposes
• IHT will be charged at 40% (or 36% where 10% of the taxable estate passes to charity) on the pension fund above available nil-rate bands
• The pension scheme administrator will be responsible for reporting and paying the IHT attributable to the pension fund directly to HMRC
• The IHT will be deducted before the remaining death benefits are paid to beneficiaries

Consultation on the detailed mechanics ran during 2025. The precise interaction with existing nil-rate band allocation (between the estate and the pension fund) was being finalised as of early 2026. Anyone with a large pension fund should take professional advice on how the 2027 changes affect their specific planning.

Planning Implications for 2026 and Beyond

Before April 2027

• Pension funds remain outside the estate — maximising pension contributions is still a tax-efficient strategy for estate planning
• Drawing from ISAs or other taxable savings before the pension preserves the pension fund’s advantageous position as long as possible
• Nominating a spouse or civil partner ensures the spousal exemption applies on first death (the fund passes to the surviving spouse without IHT)

From April 2027

• Large pension pots will face IHT — the calculation of who pays what (estate vs pension fund) will determine the net position
• Drawdown strategies may shift: it may become more tax-efficient to draw from the pension during retirement (paying income tax) and preserve other assets
• Pension drawdown trusts and charitable nominations may feature in planning to reduce the IHT impact

Defined Benefit Pensions

Defined benefit (final salary) pensions typically pay a spouse’s or dependant’s pension on death, not a lump sum fund. The income stream is not subject to IHT in the same way as a DC fund — it has no “fund value” that can be added to the estate. However, lump sum death-in-service benefits are a separate consideration and are typically outside the estate via a discretionary trust arrangement in the scheme.

Frequently Asked Questions