Pension Inheritance Tax 2027 UK: What Changes & How to Plan Now
Updated 13 May 2026 · 9 min read · England & Wales
From 6 April 2027, the UK government will bring unused defined contribution pension funds into the estate for inheritance tax. Pensions have been outside the IHT regime for decades — from next year, that changes. If you have a significant pension pot, this is the most important estate planning development in a generation. Here is what is happening and how to prepare.
What is changing: the April 2027 pension IHT reform
Currently, most defined contribution (DC) pension pots pass entirely outside the estateon death. The pension trustees use their discretion to pay death benefits to nominated beneficiaries — typically free of inheritance tax regardless of estate size. This made unused pensions extremely attractive as a vehicle for passing wealth to the next generation.
The October 2024 Autumn Budget announced that this exemption will end. From 6 April 2027, unused DC pension funds remaining on death will be included in the deceased’s estatefor IHT, taxed at 40% above the nil rate band in the same way as other estate assets.
The scale of the impact
The change catches many people who previously believed their estate was below the IHT threshold. A person who has paid off their mortgage and built up a significant pension pot may suddenly find their combined estate — property, savings, and pension — far exceeds the nil rate band.
| Asset | Example value | IHT before 2027 | IHT from April 2027 |
|---|---|---|---|
| Property | £400,000 | Estate = £550,000. NRB + RNRB = £500,000. IHT = £20,000 | Estate = £950,000. NRB + RNRB = £500,000. IHT = £180,000 |
| Cash / ISAs | £150,000 | ||
| Pension pot (unused) | £400,000 |
Illustrative example: single person, home left to children (RNRB applies). Pension pot before 2027: outside the estate. From April 2027: included. Additional IHT: £160,000.
What types of pension are affected?
The change targets defined contribution (DC) pensions — personal pensions, SIPPs, group personal pensions, and most modern workplace pensions where the fund is a pot of money rather than a promised income.
Defined benefit (DB/final salary) pensions work differently — they typically pay a dependant’s pension rather than a lump sum. The government is consulting separately on DB death benefits. Most existing DB schemes will not be affected in the same way.
The spouse exemption still applies
Transfers between spouses and civil partners are exempt from IHT. If a pension pot passes to a surviving spouse (via a death benefits nomination), no IHT arises on the first death. However:
- The survivor’s estate — now including their own pension and the inherited pension — may face IHT on the second death at the full rate
- The “double whammy” effect means large pension savers who are married need to plan for both deaths, not just the first
How will pension IHT be collected?
Under the proposed mechanism, the pension scheme administrator will be responsible for calculating and paying the IHT attributable to the pension pot before releasing the death benefits. Beneficiaries will receive the net amount after the scheme has settled the IHT with HMRC. This removes the burden from executors but means pension beneficiaries receive less than the gross fund value.
HMRC is consulting on the detailed mechanics and the interaction with the rest of the estate’s IHT calculation. The final rules may differ from the current proposal.
Seven actions to take before April 2027
- Calculate your combined estate including pensions. Add pension pots to property, savings, investments, and business interests. Compare against the nil rate band (£325,000) and, if applicable, the residence nil rate band (£175,000 for homes left to direct descendants, tapering above £2 million estate).
- Review your pension nominations. The previous strategy of nominating children over a spouse to pass the pension outside the estate is less effective. Update your expression of wishes in light of the new rules.
- Reconsider drawdown strategy. Under the old rules it made sense to draw on ISAs and other assets first, keeping the pension untouched as an IHT-free inheritance vehicle. Under the new rules, drawing the pension down more rapidly (within income tax efficiency) and accumulating ISAs or lifetime gifts may be more efficient.
- Maximise annual gift exemptions and PETs now. Use the annual exemption (£3,000/year each), small gifts, and start the 7-year clock on larger PETs before April 2027.
- Review and update your will. Larger estates may benefit from nil rate band discretionary trust provisions or life interest trust arrangements that were previously less necessary. A will written assuming the pension was outside the estate may need restructuring.
- Consider life insurance written in trust. A whole-of-life policy written in trust can provide a tax-free lump sum to help beneficiaries pay the IHT bill on the pension.
- Take professional advice. The interaction of pension drawdown, income tax (on pension withdrawals), IHT, and CGT is complex. A financial planner or chartered tax adviser specialising in retirement planning and estate planning can model the optimal strategy for your specific situation.
Frequently asked questions
What is changing about pensions and inheritance tax in April 2027?
From 6 April 2027, unused defined contribution pension funds remaining on death will be included in the deceased's estate for inheritance tax purposes. Currently, pension pots are outside the estate entirely — they pass free of IHT to nominated beneficiaries. Under the new rules, the pension funds will be counted as part of the estate and taxed at 40% above the available nil rate band (£325,000 in 2026/27, plus £175,000 residence nil rate band where applicable). The change was announced in the October 2024 Autumn Budget and is included in the Finance Act 2025.
Who is affected by the pension IHT 2027 change?
Anyone with an unused defined contribution pension pot (personal pension, SIPP, workplace DC pension) who expects to leave funds unspent on death and whose total estate — including the pension — will exceed the nil rate band. The change is most significant for: (1) people who have significant pension savings but modest other assets — previously they could draw on pensions last, keeping them outside IHT; (2) people who were using their pension as an IHT-efficient inheritance vehicle; (3) anyone with a combined estate (property + pension + savings) exceeding £500,000–£1 million. Defined benefit (final salary) pensions are different — they typically pay a dependant's pension rather than a lump sum and the rules for DB schemes are being consulted on separately.
How much extra inheritance tax could I owe under the 2027 rules?
Example: a person with a £250,000 property, £100,000 savings, and a £300,000 pension pot. Current estate (2026): property + savings = £350,000. Pension passes outside the estate. IHT: £350,000 - £325,000 NRB = £25,000 × 40% = £10,000. After April 2027: estate = £350,000 + £300,000 pension = £650,000. IHT: £650,000 - £325,000 NRB = £325,000 × 40% = £130,000. The pension inclusion adds £120,000 in extra IHT. For couples who each hold large pensions, the combined impact can be much larger.
Will the spouse exemption apply to pensions under the 2027 rules?
Yes. Transfers between spouses and civil partners are exempt from IHT — the spouse exemption applies to pension funds as it does to other assets. If a pension pot passes to a surviving spouse or civil partner (via a death benefits nomination), no IHT arises on the first death. However, the survivor's combined estate — including their own pension and the inherited pension — may then be subject to IHT on the second death. The issue for couples is that the pension IHT exemption on the first death may simply defer the tax to the second death.
Should I change my pension nomination in light of the 2027 change?
Your nomination of beneficiary form tells the pension trustees who you would like to receive any death benefits. Before April 2027, nominating a non-spouse (e.g. children) was a common IHT strategy because the pension passed outside the estate to them. After April 2027, the IHT advantage of nominating children over a spouse diminishes — though other reasons to nominate children remain. The key action: review your nominations now. Also consider: (1) whether to draw pension funds more rapidly to fund ISA and other assets that fall within a simpler IHT framework; (2) taking financial planning advice on the most tax-efficient drawdown order; (3) whether expression of wishes should be updated.
Does the 2027 change affect how pensions are paid out to beneficiaries?
Under the proposed framework, the pension scheme administrator will be responsible for paying the IHT attributable to the pension before releasing the death benefits. This means beneficiaries of pension death benefits may receive less than they expect — the IHT is settled by the scheme before the remaining benefit is paid out. HMRC is consulting on the exact mechanics, but the intention is that pension scheme administrators calculate and pay the IHT charge, then distribute the net amount to the nominated beneficiary.
What planning steps should I take before April 2027?
Key steps: (1) Calculate your combined estate including pension funds — pension + property + savings + investments. (2) Review your will to ensure it reflects the changed IHT landscape (e.g. directing assets to maximise nil rate band use). (3) Review pension nominations and expression of wishes. (4) Consider whether drawdown rate should be increased to reduce the pension pot on death — using pension funds to live on and keeping ISA / other assets for legacy. (5) Consider lifetime gifts using annual exemptions and PETs now, before April 2027. (6) Consult a financial planner or chartered tax adviser — the interaction of drawdown strategy, IHT, and income tax is complex.
Update your will before the April 2027 deadline
The pension IHT change means many people need to revisit how their estate is structured. Start with a clear, up-to-date will — WillSafe’s DIY will kit is ready in under an hour.
Get the will kit →Related guides
- Pension expression of wishes — how nominations work
- What happens to your pension when you die?
- Inheritance tax changes 2026 — the full picture
- How to reduce your IHT bill
- Life insurance in trust — the IHT-free way to insure
- IHT annual exemption — gifting £3,000 a year tax-free