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 is expected to change from 6 April 2027. Following the October 2024 Autumn Budget, the government published policy material and draft legislation indicating that most unused pension funds and pension death benefits will be included in the deceased's estate for inheritance tax purposes.
In other words, pensions may no longer be treated as a straightforward inheritance tax shelter in the way many families have previously assumed. For estates already close to or above the relevant thresholds, this could be a significant change.
At the time of writing, these proposals are scheduled to apply from April 2027, but the detailed rules remain subject to final legislation and HMRC guidance.
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. Ongoing dependant's pensions, such as a spouse's pension from a final salary scheme, are generally expected to remain outside the new inheritance tax charge. However, some defined benefit lump sum death benefits, guaranteed payments and other death benefit features may still be brought into the estate under the proposed rules.
Death-in-service benefits are expected to remain outside the scope of the new inheritance tax treatment.
Example: A widowed homeowner, aged 70, has a house worth £380,000 and an unused SIPP worth £320,000. Under previous assumptions, only the house may have formed part of the taxable estate. If the proposed April 2027 rules apply as currently drafted, the total estate could instead be treated as £700,000. Depending on the nil-rate bands and exemptions available, that could 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 necessarily mean the exact same slice of money will always suffer both taxes in full. Under the draft regulations and current guidance, double-taxation relief is expected to apply so that income tax is not charged on the part of a withdrawal used to meet the inheritance tax liability on the same pension benefits.
HMRC has also indicated that mechanisms will be put in place to deal with overpaid income tax where needed. However, even with that relief, the combined effect of inheritance tax and income tax can still materially reduce what beneficiaries ultimately receive.
In higher-rate or additional-rate beneficiary scenarios, the overall tax burden can still be severe. So while relief is expected to reduce the harshest form of double taxation, it does not remove the issue altogether.
Public concern over this point has been significant, and there has been political and industry pressure for changes to the implementation. As at April 2026, however, the intended implementation date remains April 2027.
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.
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 proposed 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 proposed 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 proposed 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.
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.
If pensions are brought into the estate from April 2027 as currently proposed, more families may 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.