For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be counted as part of your estate for inheritance tax. For many families it’s the biggest change to estate planning in years.
The short version. Pensions left to a spouse, civil partner or charity stay exempt. Death-in-service benefits are excluded. Everything else in a defined contribution pension, including SIPPs and drawdown, will usually be added to the estate, and your personal representatives will have to report and pay any tax due.
What is changing
Until now, most pension pots could be passed on outside the estate because scheme trustees had discretion over who received them. That made pensions the last thing many people spent: a tax-efficient way to pass wealth to the next generation.
The Finance Act 2026, which received Royal Assent on 18 March 2026, changes that. From 6 April 2027 the value of most unused pension funds and death benefits will be included in the deceased’s estate, whether or not the trustees have discretion. If the member dies before 6 April 2027, the old rules apply, even if the benefits are paid out later.
What stays outside inheritance tax
- Death-in-service benefits paid from a registered pension scheme, whether the scheme is discretionary or not.
- Dependants’ scheme pensions from a defined benefit (final salary) arrangement or a collective money purchase arrangement.
- Anything passing to a spouse or civil partner, under the normal spouse exemption.
- Anything passing to a registered charity.
Who reports and pays the tax
Your personal representatives (your executors, or administrators if there’s no will) will be responsible for reporting the pension and paying any inheritance tax on it. Pension schemes must give them the value of your pension, and from the moment a beneficiary becomes entitled to it, that beneficiary is jointly liable for the tax on it.
To help, personal representatives can direct a pension scheme to withhold up to 50% of the taxable benefits for up to 15 months, and to pay the tax straight to HMRC. They can also be discharged from liability for pensions discovered after HMRC has given clearance, if they made every effort to find them.
Inheritance tax is due at the end of the sixth month after death. With more estates now needing to collect information from several pension schemes, executors will need good records.
The income tax point
The existing income tax rules on pension death benefits still apply. If you die before 75, beneficiaries can usually draw the pension tax-free (within the lump sum and death benefit allowance). If you die at 75 or over, they pay income tax at their own rate on what they draw.
Where inheritance tax has been paid on the pension, the part of the benefit that corresponds to that tax doesn’t count towards the beneficiary’s taxable income. Even so, for deaths after 75 the combined effect can be significant.
A worked example
Margaret is widowed. Her husband left everything to her, so she has two nil-rate bands (£650,000) and two residence nil-rate bands (£350,000). Her estate is £800,000, including a £450,000 house that will go to her children, and she has £300,000 left in a SIPP.
| Death before 6 April 2027 | Death from 6 April 2027 | |
|---|---|---|
| Estate (excluding pension) | £800,000 | £800,000 |
| Pension counted | £0 | £300,000 |
| Allowances | £1,000,000 | £1,000,000 |
| Taxable | £0 | £100,000 |
| Inheritance tax at 40% | £0 | £40,000 |
If Margaret is over 75 when she dies, her children will also pay income tax on whatever they later draw from the remaining pension. Try your own figures in our inheritance tax calculator.
Seven things to do before April 2027
- Find out your number. Add your pensions to your estate and see whether you’re now over the allowances, or over £2 million, where the residence nil-rate band starts to taper.
- Check your nominations. Expression of wish forms decide who the trustees consider. Leaving the pension to your spouse is exempt; leaving it to children may not be.
- Rethink the spending order. Spending pensions earlier and keeping ISAs or cash may now leave more to your family. It depends on your tax rates and your beneficiaries’.
- Consider gifting from pension income. Regular gifts out of surplus income are exempt immediately, and pension income can count.
- Review tax-free cash. Taking your tax-free lump sum and gifting it starts the seven-year clock, but once it’s out of the pension you can’t put it back.
- Look at life cover in trust. A policy written in trust can pay the tax without adding to the estate.
- Keep records your executors can use. A list of every pension, with scheme names and policy numbers, will save them months.
None of these is right for everyone, and some can’t be undone. That’s why it’s worth modelling them before you act.
Sources
- Inheritance Tax on pensions: technical note (HMRC)
- Inheritance Tax: unused pension funds and death benefits (HMRC)
- Inheritance Tax thresholds and interest rates (HMRC)
This guide is general information, not personal advice, and reflects our understanding of the rules on 31 October 2026. Tax rules can change and their effect depends on your circumstances.