Pensions and inheritance tax from April 2027: what changes

What changes on 6 April 2027

Until now, most money left in a defined contribution pension, such as a personal pension, a SIPP or most workplace pensions, has sat outside your estate. Your family could inherit it without inheritance tax, because the pension scheme, not you, decided who received it.

For deaths on or after 6 April 2027, that changes. Most unused pension funds and pension death benefits will be added to the value of your estate when inheritance tax is worked out.

The government confirmed the change in a policy paper published in November 2025.

What stays outside inheritance tax

• Anything left to a spouse or civil partner. The usual spouse exemption still applies, so most married couples will see no change on the first death.
• Money left to a registered charity.
• Death-in-service benefits from a registered pension scheme, the lump sum many employers pay if you die while working for them.
• Dependants' scheme pensions from defined benefit (final salary) schemes and collective money purchase schemes.

Who has to deal with it

The personal representatives of the estate, usually the executors named in the will, are responsible for reporting and paying any inheritance tax on the pension. Pension schemes must help, including paying the tax from the pension or reimbursing executors who have already paid it.

How inheritance tax is worked out

Inheritance tax is charged at 40% on the part of an estate above your tax-free allowances. Three allowances matter here:

• Nil-rate band: £325,000. Everyone has this.
• Residence nil-rate band: up to £175,000, if you leave your home to your children or grandchildren.
• Transferred allowances: if your late spouse or civil partner did not use their allowances, you can add the unused part to yours. A widow or widower can therefore have up to £1 million tax-free.

Both bands have been frozen at these levels until April 2031.

There is one more rule that becomes important once pensions count. If the estate is worth more than £2 million, the residence nil-rate band is reduced by £1 for every £2 above that. Because the pension now counts towards the estate, it can push you over £2 million and take away some or all of that band.

Three worked examples

All three assume the home is left to children and no gifts were made in the last seven years.

Example 1 shows why most families are not affected. Even with the pension added, the estate is £500,000, exactly matching the allowances.

Example 2 is the typical case that is affected. The estate without the pension is £600,000, already £100,000 over. Adding the £250,000 pension adds 40% of £250,000: £100,000 more tax.

Example 3 shows the £2 million effect. With the pension, the estate is £2.3 million. That is £300,000 over the threshold, so the £350,000 of residence bands shrinks by £150,000. The extra tax is 40% of the pension (£280,000) plus 40% of the lost band (£60,000).

You can try your own numbers in our pension inheritance tax calculator.

The over-75 problem: tax twice

Inheritance tax is not the only tax on an inherited pension. Income tax still applies in some cases:

• If you die before 75, your beneficiaries can usually take the money free of income tax (within the lump sum and death benefit allowance).
• If you die at 75 or over, beneficiaries pay income tax at their own rate on what they take out.

From April 2027, a pension inherited from someone aged 75 or over can face both. Inheritance tax takes 40%, then the beneficiary pays income tax on what they withdraw from the rest. For an additional-rate taxpayer, that is 40% plus 45% of the remaining 60%: a combined 67%. For a higher-rate taxpayer it is 64%.

Our guide to inheriting a pension before or after 75 shows how much the way beneficiaries take the money matters.

This worst case only applies when the estate is above its allowances, the pension does not go to a spouse, and the person inheriting is a high earner.

What people are considering

This is a big change and the right response depends on your whole situation. These are the questions people are discussing with their advisers, not recommendations:

1. Check the expression of wish form. Who you name as beneficiary still matters. Leaving the pension to a spouse keeps it out of inheritance tax on the first death.
2. Change the order you spend things. Until now, many people spent ISAs and savings first and left the pension untouched to pass on. After April 2027 that advantage largely disappears for estates above the allowances.
3. Gifting from surplus income. Regular gifts from income that you do not need can be exempt from inheritance tax straight away, if they are genuinely from income and do not reduce your standard of living. Keep records.
4. Life insurance written in trust to cover an expected tax bill.

Each has costs, rules and risks. If your estate could be over the allowances, speak to a regulated financial adviser or tax adviser. If you are 50 or over, a free Pension Wise appointment is a good place to start.

How many people does this affect?

The government estimates that in 2027/28, of around 213,000 estates with pension wealth that could be inherited:

• about 10,500 will pay inheritance tax for the first time;
• about 38,500 will pay more than they would have;
• for those, the average bill will rise by about £34,000.

These are the government's own estimates and do not take account of people changing their plans.

This guide is general information, not personal financial advice. Rules can change and your situation may differ. For free, impartial help, contact MoneyHelper, or speak to a regulated financial adviser.