Inheritance Tax on Pensions From April 2027: What Families Need to Know

The key change is that unused pension wealth will no longer generally sit outside inheritance tax simply because it is held in a discretionary pension arrangement.

Historically, many defined contribution pension schemes have allowed trustees or scheme administrators discretion over the payment of death benefits.

This has often meant the benefits were not treated as part of the member's estate for inheritance tax.

From 6 April 2027, most unused pension funds and relevant death benefits will be included in the inheritance tax estate regardless of that traditional discretionary structure.

The reform applies to deaths occurring on or after the commencement date.

It is the date of death, not the date on which the pension is eventually paid, that determines whether the new rules apply.

Has the Change Become Law?

Yes.

The relevant inheritance tax changes were enacted through Finance Act 2026, which received Royal Assent on 18 March 2026.

The substantive changes take effect from 6 April 2027.

As at October 2026, HMRC has published technical notes explaining the operation of the legislation. Further implementation guidance and supporting materials are expected ahead of April 2027.

This distinction matters: the reform is enacted legislation with a future commencement date, rather than merely an unconfirmed Budget proposal.

The changes are broad, but they do not apply identically to every pension benefit.

The precise treatment depends on the scheme and type of benefit.

The distinction between a pension being within the scope of inheritance tax and inheritance tax actually being payable is important.

A pension benefit may be reportable and included in the estate calculation without producing a tax liability because an exemption or available allowance applies.

What About Defined Benefit Pensions?

Defined benefit schemes require particular care.

Some death benefits are excluded, including qualifying dependants' scheme pensions.

Other benefits, such as certain lump sums or guarantee payments, may fall within the new rules.

It would therefore be misleading to say that all defined benefit pensions are either taxable or exempt.

Scheme-specific details need to be established.

Before the reform takes effect, many unused funds held in discretionary registered pension arrangements can pass to beneficiaries outside the deceased member's inheritance tax estate.

That does not mean every pension arrangement has always been exempt.

Certain non-discretionary benefits and other pension interests have already been capable of falling within inheritance tax.

The new legislation significantly widens the scope.

Before and After April 2027

The change may be particularly relevant where pension wealth is substantial compared with the rest of the estate.

No.

The reform will not create an inheritance tax bill for every pension holder or beneficiary.

Inheritance tax depends on the combined value of the estate, the applicable allowances and the destination of the assets.

For 2026/27, the standard nil-rate band is £325,000.

An additional residence nil-rate band of up to £175,000 may apply where a qualifying home passes to eligible direct descendants.

Married couples and civil partners may also benefit from transferable unused allowances.

These provisions can substantially reduce or eliminate inheritance tax even where pension funds are included.

The Government stated in October 2026 that more than 90% of UK estates are expected to remain without an inheritance tax liability in 2030/31 following the reforms.

That is a population-wide projection, not a prediction for any particular family.

Consider a single homeowner whose assets at death are:

Assume the individual dies after 6 April 2027, and the pension funds are within the scope of the new rules.

The entire estate, including the pension, passes to adult children.

Assume the home qualifies for the full residence nil-rate band, the full standard nil-rate band is available and there are no relevant lifetime gifts, debts or other reliefs.

This is a simplified illustration of the inheritance tax position.

It does not account for any income tax that might apply when beneficiaries receive or withdraw pension benefits.

Under the previous treatment, if the £300,000 pension had remained outside the inheritance tax estate, the £500,000 non-pension estate could potentially have been covered by the available allowances.

The reform can therefore materially change the result.

Now consider a surviving spouse who dies after April 2027 with:

Assume the estate passes to adult children.

The first spouse left all their assets to the survivor, preserving the full unused standard and residence nil-rate bands.

Assume all conditions for the maximum £1 million combined allowances are satisfied.

This illustrates why couples should consider pension wealth alongside property and other assets when estimating the inheritance tax position on the second death.

The precise tax burden attributable to pension benefits, and how it is met, requires further calculation.

Qualifying transfers to a spouse or civil partner generally remain exempt from inheritance tax.

The new pension rules do not abolish the spouse exemption.

For example, if unused pension benefits pass to a qualifying surviving spouse, the relevant inheritance tax exemption may apply.

However, the benefits still need to be identified and dealt with correctly under the reporting rules.

Special restrictions can apply where the deceased and surviving spouse have different inheritance tax residence statuses.

Does This Mean the Pension Will Never Be Taxed?

No.

The spouse exemption can mean no inheritance tax is payable on the transfer to the survivor.

But pension wealth retained by the survivor may be relevant when they subsequently die.

Families should therefore consider both deaths rather than assuming that a tax-free transfer on the first death permanently resolves the inheritance tax position.

Pension benefits passing to children will not ordinarily qualify for the spouse exemption.

Their inheritance tax treatment will depend on the wider estate, the available allowances and the rules applying to the particular benefit.

This can be especially important where parents previously intended to preserve their pensions for children and spend other assets during retirement.

That approach may now need reassessment.

However, it does not follow that withdrawing the pension immediately is the best alternative.

Pension withdrawals can create income tax liabilities, reduce retirement resources and increase the value of other assets held within the inheritance tax estate.

Potentially, yes, although the legislation includes provisions to address the interaction.

Inheritance tax and income tax are separate taxes.

Inheritance tax concerns the value transferred on death.

Income tax can apply when a beneficiary receives or withdraws certain pension death benefits.

Under existing pension rules, the age of the pension holder at death and the type and timing of the benefit can affect the income tax treatment.

Broadly, pension death benefits may receive more favourable income tax treatment where the member dies before age 75, subject to the relevant rules and allowances.

Where the member dies aged 75 or over, taxable inherited pension withdrawals are generally subject to income tax at the beneficiary's marginal rate.

Will the Same Amount Be Taxed Twice?

The legislation includes mechanisms intended to prevent the same portion of a pension death benefit being subject to both inheritance tax and income tax.

The interaction can be complex.

For example, where inheritance tax is paid from a pension benefit, the income tax calculation may be based on the benefit after the inheritance tax has been deducted.

Alternative arrangements can apply where the beneficiary receives the benefit and pays the inheritance tax separately.

The outcome depends on the benefit, the tax treatment and how the inheritance tax is settled.

It is therefore misleading to suggest that every inherited pension will simply face a 40% inheritance tax charge followed by full income tax on the same amount.

Families should obtain an individual calculation where both taxes may be relevant.

Death-in-service benefits payable from a registered pension scheme are excluded from the new inheritance tax inclusion rules.

These benefits can be important for working families.

They are often provided through an employer and may pay a lump sum linked to the employee's salary if they die while employed.

The exclusion means these qualifying benefits are not automatically brought into the inheritance tax estate under the pension reform.

However, it is important to distinguish genuine death-in-service benefits from other pension death benefits.

The label used in scheme communications may not be sufficient to determine the tax position.

Scheme documentation should be checked.

Personal representatives will be responsible for reporting and paying inheritance tax due on the relevant pension wealth.

This represents a significant administrative change.

Personal representatives may need information from pension schemes even where the pension benefits are being paid directly to beneficiaries rather than into the estate's bank account.

What Will Executors Need to Do?

The practical process may involve:

1. Identifying the deceased's pension arrangements.
2. Contacting pension scheme administrators.
3. Obtaining valuations of relevant pension death benefits.
4. Establishing the intended recipients.
5. Identifying any applicable inheritance tax exemptions.
6. Calculating the estate's inheritance tax liability.
7. Coordinating payment and reporting requirements.
8. Retaining records of communications and payments.

This may increase the importance of keeping an up-to-date pension schedule with estate planning documents.

Can Pension Schemes Withhold Funds to Pay the Tax?

The legislation provides mechanisms for personal representatives to issue notices requiring pension schemes to withhold or pay amounts in specified circumstances.

For example, qualifying withholding notices can allow up to 50% of certain taxable pension benefits to be withheld for a limited period.

These arrangements are intended to help personal representatives manage inheritance tax liabilities where pension funds are held outside the estate's readily available cash.

The detailed conditions, time limits and exclusions matter.

Not every pension benefit will be subject to the same withholding arrangements.

HMRC is continuing to develop practical guidance and supporting materials for implementation.

Not automatically.

Pension beneficiary nominations, sometimes called expressions of wish, remain important.

They help pension scheme trustees or administrators understand who the member would like to receive death benefits.

However, a nomination does not necessarily create a legally binding entitlement, and it does not automatically remove the pension from inheritance tax.

When Might a Review Be Useful?

A nomination may need reviewing after:

• Marriage or civil partnership.
• Divorce or separation.
• The birth of children or grandchildren.
• The death of a nominated beneficiary.
• Entering a second marriage.
• A significant change in family circumstances.
• Changes to pension scheme arrangements.

It is also sensible to ensure nominations are consistent with wider estate planning intentions.

For example, a person may have updated their will after divorce but forgotten to review an old pension expression of wish.

A pension nomination and a will perform different functions, so both should be checked.

There is no universal answer.

Some people may consider withdrawing pension funds to reduce the amount left unused at death.

However, this can create substantial financial and tax consequences.

Income Tax on Withdrawals

Pension withdrawals can be subject to income tax.

Taking a large amount in one tax year may push someone into a higher tax band.

That can reduce the value ultimately available to them and their family.

The Money May Still Be in Your Estate

Withdrawing money from a pension does not automatically remove it from inheritance tax.

If the money remains in a bank account or investment portfolio when you die, it may still form part of your estate.

The tax outcome may therefore be worse, similar or better depending on the circumstances.

Retirement Income and Longevity

Pensions are primarily intended to support retirement.

Drawing down funds earlier than needed can reduce future income and investment flexibility.

People also need to consider inflation, unexpected expenditure, health costs and the possibility of living longer than anticipated.

A decision driven solely by inheritance tax could undermine financial security.

Key point: The April 2027 reform is a reason to review pension and estate planning, not a reason to withdraw pensions indiscriminately.

Potentially, but gifting strategies require careful assessment.

For example, someone with surplus income may be able to make qualifying gifts under the normal expenditure out of income exemption.

Other gifts may fall within the annual gift exemption or become exempt after seven years.

However, money withdrawn from a pension may be subject to income tax before it can be gifted.

The timing, source of funds and donor's ongoing financial needs are important.

A gift that reduces inheritance tax exposure may still be inappropriate if it leaves the donor without sufficient resources.

Where substantial pension withdrawals or gifts are contemplated, regulated financial and specialist tax advice may be necessary.

Yes.

The residence nil-rate band is reduced where the relevant estate exceeds £2 million.

From April 2027, pension wealth brought into the estate under the new rules may increase the value used when assessing that threshold.

This can mean the pension reform has consequences beyond inheritance tax directly attributable to the pension itself.

Example: Pension Wealth Pushes an Estate Above £2 Million

Suppose a surviving spouse has non-pension assets worth £1.85 million.

They also have £350,000 in unused pension funds that will be included under the new rules.

The combined estate is £2.2 million.

The estate exceeds the residence nil-rate band taper threshold by £200,000.

This produces a potential taper reduction of £100,000.

If the estate would otherwise qualify for the full £350,000 combined residence nil-rate band, the allowance could be reduced to £250,000, assuming the first spouse's transferable allowance was unaffected by tapering.

This is a simplified illustration.

It demonstrates why pension inclusion can affect allowances as well as the taxable estate value.

A practical review should begin with information rather than immediate asset transfers.

Pension and Estate Planning Checklist

This review may reveal that no immediate action is necessary.

For other families, it may identify a need for more detailed modelling.

The right response depends on the estate, beneficiaries and pension arrangements.

Pensions can no longer be considered separately from the wider inheritance tax position.

At Telmar Estate Planning, an estate planning review can begin by identifying how pension death benefits fit alongside the family home, savings, investments, wills and intended beneficiaries.

This may help families recognise issues such as outdated beneficiary nominations, inconsistent inheritance arrangements or a potential increase in the estate's inheritance tax exposure.

Pension withdrawal strategies, investment decisions and detailed tax calculations may require regulated financial advice or specialist tax input.

The objective should be to understand the implications of the legislation and make decisions that protect both retirement security and family intentions.

From 6 April 2027, most unused pension funds and certain pension death benefits will fall within the scope of UK inheritance tax.

The change is legislated for, but not every pension benefit is included and not every family will face an additional tax bill.

Spouse exemptions, available nil-rate bands, the type of pension benefit and the wider estate remain important.

For families with significant pension savings, the reform makes it sensible to revisit inheritance tax estimates, beneficiary nominations and estate administration arrangements.

The most effective response is a considered review rather than a rushed withdrawal or transfer of pension funds.

1. HMRC — Inheritance Tax: Unused Pension Funds and Death Benefits
   https://www.gov.uk/government/publications/inheritance-tax-unused-pension-funds-and-death-benefits
   Official policy summary of the reform, commencement date, exclusions and responsibilities.

2. HMRC — Technical Note: Inheritance Tax on Pensions
   https://www.gov.uk/government/publications/inheritance-tax-on-pensions-technical-note/technical-note-inheritance-tax-on-pensions
   Detailed explanation of the Finance Act 2026 legislation, reporting requirements, payment mechanisms and interaction with income tax.

3. HMRC — Inheritance Tax on Pensions: Technical Note 2
   https://www.gov.uk/government/publications/inheritance-tax-on-pensions-technical-note-2
   Further technical information about pension valuations, information sharing, withholding notices and clearance.

4. GOV.UK — Tax on a Private Pension When You Die
   https://www.gov.uk/tax-on-your-private-pension/when-you-die
   General guidance on inherited pension benefits and their income tax treatment.