Pensions and IHT 2027 UK: How the Budget Changed Inherited Pension Rules
Updated 31 May 2026 · 9 min read · Inheritance Tax & Pensions
Important: The October 2024 Budget announced a significant change to pensions and IHT from April 2027. The detailed legislation is still being finalised. This article explains the announced changes and their implications — but verify the current rules with a qualified pension and tax adviser before taking action, as the legislation may change before implementation.
For decades, pensions were one of the most powerful inheritance tax planning tools available in the UK. Money left in a pension pot on death passed outside the estate — free of IHT. The October 2024 Budget changed this fundamentally: from April 2027, most inherited pension funds will be brought into the IHT estate. This affects millions of pension holders and requires estate plans to be thoroughly reviewed.
The Current Position (Before April 2027)
Before the Budget change takes effect, defined contribution (DC) pension pots pass outside the IHT estate because:
- Pension death benefits are paid at the discretion of the pension trustees, guided by the member’s nomination form — they are not legally part of the member’s estate.
- Because the fund is not part of the estate, it is not subject to IHT and does not require probate to release.
- A pension pot of any size can currently pass to children, grandchildren, or other nominees free of IHT — making pensions the ultimate IHT planning vehicle for accumulating wealth to pass on.
The October 2024 Budget Change
From 6 April 2027, unused pension funds and death benefits from registered pension schemes will generally be included in the deceased’s estate for IHT purposes. The announced rules:
| Aspect | Before April 2027 | From April 2027 (as announced) |
|---|---|---|
| DC pension fund on death | Outside estate — no IHT | Inside estate — subject to 40% IHT (with NRB etc.) |
| Pension to surviving spouse | Outside estate — no IHT | Spouse exemption expected to apply — IHT exempt |
| DB lump sum on death | Generally outside estate | Expected to be included — details to be confirmed |
| Pension passed through probate? | No — paid by trustees outside estate | No — still paid by trustees, but included for IHT calculation |
The key point: pensions will be counted in the estate for IHT calculation purposes but are not expected to pass through the will or probate process — pension trustees will continue to pay death benefits at their discretion, guided by nominations. The change is to the tax treatment, not the legal ownership or succession mechanism.
The Impact: A Worked Example
Example — single person, 70, dying after April 2027
- Property (sole owner):£400,000
- ISA / savings:£100,000
- DC pension pot:£350,000
- Total estate (new rules):£850,000
- NRB:(£325,000)
- RNRB (home to children):(£175,000)
- Taxable excess:£350,000
- IHT at 40%:£140,000
Before April 2027: the pension would be excluded; taxable estate = £500,000 − £500,000 (NRB + RNRB) = £0 IHT. The pension change creates a £140,000 IHT bill from nothing.
Why Keep Your Pension Nominations Updated
Even with the IHT treatment changing, pension nominations remain critically important. The nomination guides the trustees on who should receive the death benefits — and whether the spouse exemption applies depends on whether the pension is nominated to a spouse. Failing to complete or update a nomination form means the trustees decide entirely at their own discretion — which may not align with your wishes. Review your nomination form with each pension provider, especially after major life events: marriage, divorce, birth of children, or the death of a previously nominated beneficiary.
FAQs
Are pensions currently exempt from inheritance tax in the UK?
Before the October 2024 Budget announcement, most defined contribution pension funds (money purchase pensions) were outside the deceased's estate for inheritance tax purposes. This was because pension death benefits are typically paid at the discretion of the pension scheme trustees, not as part of the estate — so they did not form part of the IHT estate. This made pensions one of the most powerful IHT planning tools available: a person could accumulate large pension pots, spend other assets during their lifetime, and pass the pension tax-free to their beneficiaries. Defined benefit (final salary) schemes generally do not have a transferable fund — they pay a pension or lump sum on death specified by the scheme rules. State pensions are not inheritable in the same way. The April 2027 change affects primarily defined contribution (DC) pension pots.
What did the October 2024 Budget announce about pensions and IHT?
The Autumn Budget 2024 (30 October 2024) announced that from 6 April 2027, unused pension funds and death benefits payable from a registered pension scheme will generally be included in the deceased member's estate for inheritance tax purposes. This reverses the longstanding position that pension funds passed outside the estate. The practical effect: a pension pot of £500,000 left to children after a death on or after 6 April 2027 would increase the estate value by £500,000 for IHT calculation — potentially creating an IHT liability of up to £200,000 (£500,000 × 40%) on the pension element alone, depending on the overall estate size and available reliefs. The government stated that the purpose is to ensure pensions are used for their intended retirement income purpose rather than being used primarily as IHT-efficient inheritance vehicles. The legislation implementing these changes was not finalised as of the date of this article — final rules, exemptions, and the detailed interaction with the nil-rate band and spouse exemption should be verified with specialist pension and tax advice before taking planning action.
Are there exemptions — will all pension death benefits be subject to IHT?
The October 2024 announcement indicated that the spouse exemption will still apply to pension death benefits passing to a surviving spouse or civil partner — so pensions left to a spouse should remain IHT-exempt (consistent with the general inter-spouse IHT exemption). Defined benefit scheme lump sums on death (where a fund value is paid as a one-off payment) are also expected to be included in the estate from 2027. However, defined benefit scheme continuing widow's/widower's pensions (income-form benefits) are generally not a transferable fund and are expected to be treated differently. Some exemptions may apply for dependant's pensions. The detailed implementation is subject to consultation and legislation — the government published a technical consultation in late 2024 and further guidance is expected before April 2027. Given the scale and complexity of the change, specialist advice from a pension adviser and tax specialist is essential before making any changes to pension nominations or estate planning structures.
What can pension holders do now to plan for the April 2027 change?
The key planning considerations following the October 2024 Budget change are: (1) Review pension nominations — ensure nominations align with your updated estate planning wishes. For surviving spouses, the spouse exemption should still apply — nominating a spouse for pension death benefits may remain IHT-efficient. (2) Revisit pension drawdown strategy — if the primary reason for leaving a pension undrawn was IHT efficiency (passing the fund to children tax-free), this argument is significantly weakened from April 2027. Taking income from the pension during your lifetime may now be more tax-efficient than accumulating a large pot for inheritance. (3) Consider the interaction with the nil-rate band — if the pension is included in the estate, it 'uses up' the NRB alongside other assets, potentially increasing the IHT bill significantly. (4) Life insurance review — a whole-of-life policy written in trust could be structured to pay the IHT on the pension element without eroding the pot. (5) Seek specialist advice — this is a significant planning change that affects millions of pension holders; individual circumstances vary enormously, and generic guidance cannot substitute for personalised advice. (6) Do not panic-sell or make irreversible changes — the legislation is not yet finalised.
Does the 2027 pension IHT change affect the way I should write my will?
Possibly yes. Before the October 2024 Budget, many estate plans were structured to draw on non-pension assets first (ISAs, property, savings) during retirement, leaving the pension pot intact as an IHT-efficient inheritance for children. With pensions potentially forming part of the IHT estate from April 2027, this strategy is less automatically beneficial. Wills should be reviewed: (1) Where a pension was nominated to children primarily for IHT reasons, the rationale changes significantly; consider whether nominating to a spouse (still IHT exempt) and having the spouse's will address the pension indirectly remains more efficient. (2) Where a pension forms a significant part of the estate, the will's use of the nil-rate band and RNRB needs to be recalculated with the pension included. (3) Trusts for vulnerable beneficiaries — discretionary trusts in wills may interact differently with pension death benefits included in the estate. The key message is to obtain updated financial and legal advice: wills and pension nominations should be reviewed together, as a package, before April 2027 to ensure your overall estate plan still achieves your wishes.
How are pension death benefits currently paid — does a pension go through probate?
Currently, pension death benefits are not typically paid through the estate and do not go through probate — this is one of their key advantages. The pension scheme trustees pay the death benefits at their discretion, guided by a nomination form completed by the member. Because the payment is discretionary (even if the trustees almost always follow the nomination), the fund is not legally part of the estate and does not require a grant of probate to release. From April 2027, while pension funds may be included in the estate for IHT calculation purposes, they are not expected to be included in the estate for succession purposes — they will still be paid by the pension trustees outside the will and outside probate. The IHT treatment changes; the probate and succession treatment does not (based on the October 2024 announcements). Pension nominations therefore remain important — completing and updating a nomination form is essential to guide the trustees, even if the IHT treatment of the pension changes.
Review Your Will and Pension Nominations Together
The April 2027 pension IHT change makes it essential to review your will, pension nominations, and overall estate plan together. WillSafe’s DIY will kit for England and Wales provides the will component — updated to work with your broader estate planning.
Start Your Will ›