SIPP and Inheritance Tax: How Self-Invested Pensions Are Treated for IHT
A SIPP is currently one of the most IHT-efficient assets you can own — it sits entirely outside your estate. But the April 2027 reform will bring pension death benefits into the IHT net. The planning window is closing.
SIPP IHT Treatment: Now vs April 2027
| Scenario | Before April 2027 | From April 2027 |
|---|---|---|
| SIPP in estate for IHT? | No — outside estate (discretionary trust) | Yes — pension fund included in estate at death |
| Death before age 75 — income tax on inherited pension withdrawals | None — entirely tax-free | None (income tax rule unchanged) — but 40% IHT now applies to the pot above NRB |
| Death after age 75 — income tax on inherited pension withdrawals | Beneficiary's marginal rate (up to 45%) | Marginal rate (up to 45%) + 40% IHT on pot above NRB = effective rate up to ~67% |
| DB (defined benefit) lump sum in trust | Outside estate | Broadly still outside estate — reform targets unused DC/SIPP pots |
| Expression of wishes nomination | Guides trustees — SIPP still outside estate | Still guides trustees but pot now subject to IHT before distribution |
Planning Before April 2027
Review expression of wishes nominations immediately
Your pension nomination sits entirely outside your will. Check it names the right people. An outdated nomination naming an ex-spouse or deceased parent will be ignored by trustees — causing delay and potential dispute.
Consider drawing on the pension before 2027
For those whose estate is already above the NRB/RNRB, drawing on the pension (taking income or UFPLS) and using the proceeds for IHT-efficient purposes (gifts, ISAs, life insurance in trust) may be more tax-efficient than leaving the pot to be hit by both IHT and income tax after 2027.
Assess the impact on your overall NRB position
Post-2027, the pension pot will use up NRB. An estate of £600,000 (excluding pension) + £400,000 SIPP = £1,000,000 total — £675,000 above NRB + RNRB on a typical estate. Model the overall IHT before and after 2027 to understand the impact.
Consider life insurance in trust to fund the IHT
A whole-of-life policy written in trust (outside the estate) can fund the IHT liability that will arise on the pension from 2027. The policy proceeds pay the trustees' IHT bill without depleting estate assets beneficiaries expected to receive.
Take specialist IHT and pension advice urgently
The 2027 rules are complex — consultation is ongoing and HMRC guidance is being developed. Do not wait until 2027 to plan. Take integrated IHT + pension advice now, before the window closes.
Frequently Asked Questions
Is a SIPP included in your estate for inheritance tax purposes?
Under current rules (before April 2027): No. A SIPP (Self-Invested Personal Pension) is held in a discretionary trust by the pension scheme trustees. Because the SIPP does not form part of your legal estate, it is not subject to UK inheritance tax on death. The pension trustees pay the death benefit to the nominated beneficiary (or beneficiaries) at their discretion — guided by your expression of wishes nomination form. This is a major IHT advantage: a £500,000 SIPP death benefit passes entirely free of IHT to the nominated beneficiary. However: from 6 April 2027, the government has legislated to bring most pension death benefits into the estate for IHT purposes. This fundamentally changes the planning position. See the 2027 FAQ below.
Does it matter whether the SIPP holder dies before or after age 75?
Yes — the age at death matters significantly for income tax (not IHT) on the inherited pension: Death before age 75: the nominated beneficiary receives the pension pot entirely free of income tax. They can take it as a lump sum or go into drawdown, and any withdrawals are tax-free. This is one of the most valuable features of a SIPP for estate planning. Death after age 75: the pension pot passes free of IHT (under current pre-2027 rules) but withdrawals by the beneficiary are taxed as the beneficiary's income at their marginal rate (20%, 40%, or 45%). A beneficiary who is a basic-rate taxpayer inheriting a drawdown pension from a post-75 death pays 20% income tax on withdrawals — still a significant advantage over the 40% IHT that would apply to other assets. After April 2027, both scenarios will also be subject to IHT at 40% above the nil-rate band.
How does an expression of wishes nomination work for a SIPP?
An expression of wishes (or nomination of beneficiaries) form is the document you complete to tell the pension trustees who you want to receive your SIPP on death. Key points: (1) It is not legally binding — the trustees use their discretion, guided by the nomination; (2) Precisely because it is discretionary (not a binding direction to pay a specific person), the death benefit remains outside your estate for IHT; (3) If you make it a binding nomination (allowed by some schemes), the benefit may become part of your estate and attract IHT; (4) You should keep your nomination up to date — a nomination made decades ago naming an ex-spouse or deceased parent will be disregarded by the trustees in practice, but it causes delay and possible dispute; (5) The nomination sits entirely outside your will — changing your will does NOT change your pension nomination. Both documents must be updated.
What is the April 2027 SIPP IHT reform and how does it affect planning?
In the Autumn Budget 2024, the government announced that from 6 April 2027, most unused pension death benefits (including SIPP death benefits in drawdown and uncrystallised funds) will be brought into the estate for IHT purposes. The key changes: (1) The pension trustees will be responsible for reporting the pension death benefit to HMRC and accounting for IHT at 40% on the pension value above the nil-rate band; (2) A new Pension Death Benefit (IHT) mechanism will operate alongside existing income tax rules for inherited pension withdrawals — meaning post-2027 the beneficiary may bear both IHT (40%) and income tax on withdrawals (up to 45%), creating an effective rate on post-75 death benefits of up to 67%; (3) The nil-rate band (£325,000 in 2026-27, frozen until 2030) will be shared across the whole estate including the pension; (4) The April 2027 date gives a window to act — planning options include: spending down the pension before 2027 to fund gifts or other tax-efficient strategies, taking benefits to increase the estate but use NRB/RNRB efficiently, charitable gifts from the pension pot. Take specialist advice urgently — the rules are complex and still being finalised through consultation.
What is the difference between a SIPP and a defined benefit pension for IHT?
For IHT purposes: A SIPP (and most personal pensions with fund values) is currently outside the estate and nominated beneficiaries receive the fund. From April 2027 this changes. A defined benefit (final salary) pension has no fund/pot — on death it typically pays a spouse's/dependant's pension plus possibly a lump sum (usually 2-4× salary, discretionary). The lump sum from a DB scheme in trust is outside the estate. The spouse's/dependant's pension is not an asset that forms part of the estate — it is an income entitlement. The April 2027 reform largely does NOT affect DB lump sums in trust — these remain outside the estate as they are not 'unused' pension funds in the same sense. The reform primarily targets drawdown pots and uncrystallised SIPP/SIPPS/DC pension funds.
Update Your Will to Coordinate with Your SIPP Nomination
Your SIPP nomination and your will are separate documents — both must be current and coordinated. The WillSafe kit helps you prepare a clear, up-to-date will from £19.97 for England and Wales.