What has changed?
For many people, pensions have historically been a tax-efficient way to pass wealth to the next generation. In broad terms, unused defined contribution pension funds have often sat outside the estate for inheritance tax purposes, although the detailed treatment has depended on scheme rules and how death benefits were structured.
That position changes from 6 April 2027. The change was announced at the October 2024 Autumn Budget and is now law: it was enacted in the Finance Act 2026, which received Royal Assent on 18 March 2026. From that date, most unused pension funds and pension death benefits are included in the deceased's estate for inheritance tax purposes. HMRC's technical note on inheritance tax on pensions sets out the government's own account of the change.
In other words, pensions are no longer a straightforward inheritance tax shelter in the way many families have previously assumed. For estates already close to or above the relevant thresholds, this is a significant change.
The rules apply to deaths on or after 6 April 2027. Deaths before that date are unaffected, and the existing treatment continues to apply to them.
Who is affected?
The change is likely to affect most people with defined contribution pensions, including SIPPs, personal pensions and workplace money purchase schemes, where funds remain at death.
Defined benefit pensions are more nuanced. A dependant's scheme pension, such as a spouse's ongoing pension from a final salary scheme, is an excluded benefit and stays outside the new inheritance tax charge. However, defined benefit lump sum death benefits are generally within scope, as are dependant's drawdown and nominee's flexi-access drawdown.
Death-in-service benefits from a registered pension scheme are excluded from the new treatment. The exclusion depends on the member being in employment immediately before death, so it may not cover someone who had already left service. Joint-life annuities bought alongside a member's lifetime annuity are also excluded, and charity lump sum death benefits remain tax-free.
Example: A widowed homeowner, aged 70, has a house worth £380,000 and an unused SIPP worth £320,000. Under the previous treatment, only the house would generally have formed part of the taxable estate. On a death on or after 6 April 2027, the total estate is instead treated as £700,000. Depending on the nil-rate bands and exemptions available, that can create an inheritance tax liability that would not previously have arisen.
Could my family pay tax twice?
This is one of the most common concerns raised since the announcement. In some circumstances, a pension fund may be exposed to both:
- Inheritance tax - because the pension fund is included in the estate
- Income tax - because the beneficiary may pay income tax when withdrawing inherited pension funds, particularly where death occurs on or after age 75
That does not mean the exact same slice of money suffers both taxes in full. Relief applies so that income tax is not charged on the portion of the death benefits equivalent to the inheritance tax due on that pension, and HMRC has mechanisms for reclaiming income tax overpaid where that happens.
Even with that relief, the combined effect of inheritance tax and income tax can still materially reduce what beneficiaries ultimately receive. The clearest way to see it is with actual figures.
A worked example: £100,000 of unused pension
Assume a death on or after 6 April 2027, at age 75 or over, with £100,000 of unused pension passing to an adult child. The estate has already used up its nil-rate bands, so the pension is charged to inheritance tax at the full 40%. The inheritance tax comes off first, and only what is left is then taxed as income in the beneficiary's hands.
| Beneficiary's income tax rate | Basic 20% |
Higher 40% |
Additional 45% |
|---|---|---|---|
| Unused pension fund | £100,000 | £100,000 | £100,000 |
| Less inheritance tax at 40% | (£40,000) | (£40,000) | (£40,000) |
| Balance that is taxable as income | £60,000 | £60,000 | £60,000 |
| Less beneficiary's income tax on the balance | (£12,000) | (£24,000) | (£27,000) |
| Beneficiary actually receives | £48,000 | £36,000 | £33,000 |
| Effective total tax rate | 52% | 64% | 67% |
The relief is doing real work here. Income tax is charged on the £60,000 that is left, not on the original £100,000. Without it, a higher-rate beneficiary would pay £40,000 of inheritance tax and then £40,000 of income tax on the same £100,000, leaving just £20,000 from a £100,000 pot - an 80% effective rate.
Even so, a £100,000 pension turning into £36,000 in a higher-rate beneficiary's hands is the figure that surprises most people. Illustration only, based on the rules as they currently stand and on 2026/27 rates and bands for a beneficiary in England, Wales or Northern Ireland. Scottish income tax rates differ.
Three practical points sit behind those numbers. First, the inherited pension withdrawal is added to the beneficiary's other income for the year, so a single large withdrawal can push a basic-rate taxpayer into the higher-rate band, and income above £100,000 also starts to strip away their personal allowance. Drawing the money down over several tax years, rather than all at once, can change the outcome significantly.
Second, where death occurs before age 75, death benefits are generally free of income tax, so in most cases only the inheritance tax charge applies. GOV.UK explains the income tax position on a private pension you inherit. Third, nothing arises at all where the death benefits pass to a spouse or civil partner, as set out below.
So while the relief removes the harshest form of double taxation, it does not remove the issue altogether. In higher-rate or additional-rate beneficiary scenarios, the overall burden can still be severe.
Transfers between spouses - is there protection?
Yes - in general, death benefits passing to a surviving spouse or civil partner should continue to benefit from the spousal exemption for inheritance tax, provided the relevant conditions are met.
This means that if pension death benefits pass to a surviving spouse or civil partner, no inheritance tax would usually arise at that point. The practical effect is that the exposure is more likely to crystallise on the surviving spouse's or civil partner's later death, when their own estate is assessed.
For many married couples and civil partners, that makes this more of a second-death planning issue than a first-death issue.
Who actually pays the tax, and when?
This is the part that catches families out in practice. Your personal representatives - the executors of your estate - are responsible for reporting and paying the inheritance tax on unused pension funds, even though the pension itself sits outside the will and is paid by the scheme. Once benefits have been paid out to a beneficiary, that beneficiary can also become jointly liable.
The Finance Act 2026 introduced some machinery to make that workable:
- Withholding notices. Personal representatives can require a scheme to hold back up to 50% of taxable death benefits, for up to 15 months from the end of the month of death, while the inheritance tax position is settled.
- The Pensions Direct Payment Scheme. A beneficiary can instruct the scheme administrator to pay inheritance tax straight to HMRC, for amounts of £1,000 or more. The administrator must pay within 35 days.
- Valuations. Schemes must provide a value to personal representatives within 28 days of a request, or provide an estimate.
The practical point for families is timing and liquidity: the tax can fall due before the pension money has actually reached the people who are expected to fund it. That is worth thinking about now, not at the point of death.
What are the planning options?
The right approach depends heavily on your wider estate, your retirement income needs, your health, your family circumstances, and your objectives. There is no one-size-fits-all solution. However, these are some of the main planning areas now being discussed.
1. Review how much pension you actually plan to leave
If your previous strategy was to preserve your pension largely untouched as a tax-efficient legacy asset, the new rules may justify a rethink. Drawing more from a pension during retirement may reduce the amount left exposed to inheritance tax on death.
That said, pension withdrawals above any available tax-free cash are generally taxable as income, so accelerating withdrawals can simply swap one tax issue for another if done without proper planning.
2. Consider whether annuity purchase deserves a fresh look
For some people, annuities may now merit reconsideration. A conventional lifetime annuity that simply stops on death does not usually form part of the estate in the same way, because the income dies with the member.
However, this is not true of every annuity feature. Annuity protection lump sum death benefits and certain guaranteed-period payments may still fall within the new inheritance tax rules, so the detail matters.
Annuity rates have improved materially from the very low levels seen in earlier years, and for some retirees a blend of secure income and simpler estate planning may now be more attractive than pure drawdown.
3. Review your pension nomination of beneficiary
A nomination does not by itself determine whether inheritance tax applies, but it still matters greatly. It helps determine who receives the death benefits and can affect how benefits are paid and taxed in practice.
Nominations should be reviewed to make sure they still reflect your wishes and remain sensible under the new rules. In some cases, trust-based or discretionary arrangements may still offer planning flexibility, although this is a specialist area and depends on both the pension scheme and wider estate planning objectives.
4. Make use of gifting rules where appropriate
You can usually give away up to £3,000 per tax year immediately free of inheritance tax, with the ability to carry forward one previous year's unused annual exemption in some cases. The GOV.UK guidance on inheritance tax and gifts sets out the exemptions and the seven-year rule in full.
Larger gifts may fall outside the estate if you survive seven years. Regular gifts made from surplus income can also be immediately outside the estate where the conditions for the normal expenditure out of income exemption are met.
These rules can be powerful, but they need to be documented properly and considered alongside your own income security.
5. Consider trust planning carefully
Trusts can still play a role in inheritance tax planning, but the rules are technical and the interaction with pensions can be complex. This is not an area for generic DIY planning.
Whether a trust is appropriate depends on the asset involved, your objectives, the beneficiaries, and the tax consequences both now and later.
6. Recheck your nil-rate band and residence nil-rate band position
The standard inheritance tax nil-rate band is currently £325,000, and the residence nil-rate band can add up to £175,000 where the relevant conditions are met and a qualifying residence passes to direct descendants.
That can mean a combined threshold of up to £500,000 for an individual and potentially £1 million for a couple, although the residence nil-rate band tapers away once an estate exceeds £2 million.
Both allowances are frozen until April 2031. The freeze was extended by a further year at the Autumn Budget 2025. Because the thresholds are standing still while property and investment values move, more estates drift into inheritance tax each year without anyone's circumstances changing.
With pensions brought into the estate from April 2027, more families will find themselves pushed into taper territory or into an inheritance tax position they had not previously expected.
What should I do before April 2027?
The first step is to understand your position properly: the approximate value of your estate, the value of your pensions, the likely availability of nil-rate bands, and whether your current retirement income strategy still makes sense if the rules change as expected.
From there, the planning options become clearer. Some people may decide to do very little; others may want to revisit withdrawals, gifting, nominations, annuity use or wider estate planning.
There is still planning time before April 2027, but many sensible strategies work best when considered in advance rather than at the last minute.
Sources and further reading
The figures and rules described above are drawn from the following primary sources. Thresholds and guidance can change, so it is worth checking the current position directly.
- HM Treasury and HMRC, Technical note: Inheritance Tax on pensions - the government's own explanation of the change.
- Finance Act 2026 - Part 2 contains the inheritance tax provisions on pension interests, including liability and the scheme administrator payment machinery.
- GOV.UK, Inheritance Tax - the £325,000 nil-rate band, rates and the spouse or civil partner exemption.
- GOV.UK, Inheritance Tax: residence nil rate band - the additional £175,000 allowance and the £2 million taper.
- GOV.UK, Inheritance Tax on gifts - the £3,000 annual exemption, the seven-year rule and normal expenditure out of income.
- GOV.UK, Tax on a private pension you inherit - how income tax applies to inherited pension funds, including the age 75 distinction.