Inheritance tax on pensions from April 2027: what's changing
From 6 April 2027 most unused pension funds will be included in your estate for inheritance tax. Combined with income tax on inherited pensions where death is at or after age 75, unspent pension can face a high effective rate. Here's how it works and how to model it.
Pensions join your estate
Most unused pension pots will count towards inheritance tax, a major change to how pensions pass on.
IHT above your allowances
Inheritance tax is 40% on the estate above the nil-rate bands, and pensions will now be part of that sum.
Nil-rate + residence bands
The nil-rate band is £325,000, plus up to £175,000 for a home left to descendants. Above that, IHT can apply.
IHT then income tax
Over 75, a pot can face IHT and then income tax as beneficiaries draw it. That combined rate is worth understanding.
More estates than you'd think
Frozen thresholds plus pensions coming into scope pull many more families into the net from 2027.
Model the 2027 rules
See your estate and IHT under the new rules, as an illustration to plan around, not advice.
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Guidance and illustrations only, not regulated financial advice. Tax rules change and depend on your circumstances. Confirm your own position and consider speaking to a qualified, regulated financial adviser before acting.
The headline change
This is now law, not a proposal. Announced at the Autumn Budget 2024 and enacted in the Finance Act 2026 (Royal Assent 18 March 2026), the change applies to deaths on or after 6 April 2027. From that date, most unused pension funds and death benefits (SIPPs: self-invested personal pensions; personal and workplace defined-contribution pots: pot-based pensions; and flexi-access drawdown funds: a pot kept invested that you draw from) will be brought within your estate (everything you own when you die) for inheritance tax (IHT), taxable at up to 40% above your available allowances.
Today, most defined-contribution pension pots sit outside your estate, so they can usually pass to your beneficiaries (the people who inherit from you) free of inheritance tax. That’s what’s reversing.
Who’s affected, and what’s excluded
The government estimates around 10,500 estates will become newly liable for IHT, and a further 38,500 will pay more, with an average extra bill of roughly £34,000. Some transfers stay outside the charge, notably anything passing to a surviving spouse or civil partner or to charity, registered-scheme death-in-service benefits (a lump sum paid if you die while still employed), and dependants’ scheme pensions from defined-benefit schemes (which promise a set income, like final-salary pensions).
The spouse exemption is why the bill on a first death is commonly nothing, and why the charge tends to land on the second. If you are planning as a couple, that’s only half the story: income can fall by half on the first death while spending falls by far less, which is the arithmetic in retirement planning as a couple.
Why it matters
Inheritance tax is charged at 40% on the value of your estate above the available tax-free allowances (the nil-rate band, £325,000, and the residence nil-rate band (an extra allowance for leaving your home to direct descendants such as children or grandchildren), up to £175,000, which tapers away, shrinks then disappears, for estates over £2m).
Bringing pensions into the estate means a pot you had earmarked for your family could now be reduced by IHT before they receive it, where previously it often passed tax-free.
The part that’s easy to miss: a possible double hit
There’s a second, separate rule that already exists. If you die at or after age 75, your beneficiaries pay income tax at their own marginal rate (the highest rate of income tax they pay) when they draw from an inherited pension. Below that age it is normally tax-free: gov.uk splits the treatment at under 75 against 75 or over, so dying on your 75th birthday falls on the taxable side.
From April 2027, an unspent pension could therefore face both:
- Inheritance tax at 40% on the way into the estate, and then
- Income tax when your beneficiary withdraws what’s left.
Stacked together, the effective rate on each £1 of unspent pension can be high, which changes the maths on whether it’s better to spend a pension down, draw it to fund gifts, or leave it.
A worked example
A £100,000 unspent pension, left to one person, where the estate is already above the nil-rate bands so the whole pot is exposed, and death is at or after 75. What reaches them:
| The person inheriting | Today | From April 2027 | Lost to tax |
|---|---|---|---|
| Earning £30,000 | £80,000 | £48,000 | 52% |
| Earning £60,000 | £60,000 | £36,000 | 64% |
| Earning £130,000 | £55,000 | £33,000 | 67% |
That assumes they draw it evenly over ten years. Taken in a single year instead, the same £100,000 reaches them as:
| The person inheriting | Today | From April 2027 | Lost to tax |
|---|---|---|---|
| Earning £30,000 | £58,783 | £40,054 | 60% |
| Earning £60,000 | £53,229 | £32,000 | 68% |
| Earning £130,000 | £55,000 | £33,000 | 67% |
Two things worth drawing out of that.
How long they take matters as much as the rule change, for some people. The £30,000 earner keeps around £8,000 more by spreading the same inherited pot over ten years rather than taking it at once, because a single large withdrawal climbs out of the basic-rate band and into the higher one. Nobody chooses the rules; the beneficiary does choose the speed, long after the plan was made.
Taking it in one year, the £60,000 earner keeps less than the £130,000 earner. That is not a mistake in the table. A £100,000 withdrawal on top of £60,000 of salary passes straight through the band between £100,000 and £125,140 where the personal allowance is withdrawn, and the money landing there is taxed at an effective 60%. Someone already earning £130,000 has no personal allowance left to lose, so that band costs them nothing.
These come from the same engine the planner runs on, at the current tax bands, and they are an illustration of one situation rather than a forecast of yours. Your own estate, allowances, who inherits and what else they earn all move them.
What you can actually do about it
This is exactly the kind of trade-off worth modelling rather than guessing. The right answer is personal. It depends on your other assets, your spending, your age, and who you’re leaving money to. Things people look at include the order they draw their pots (pension first vs ISAs first), gifting during their lifetime, and how much pension to spend down versus preserve.
Our free tool lets you see your projected estate, a clear inheritance-tax waterfall, and the combined effective rate on unspent pension under the post-2027 rules, for your own numbers.
In short
- From 6 April 2027, most unused pensions are in your estate for inheritance tax.
- That can mean 40% IHT, and, if you die at or after 75, income tax for your beneficiaries on top.
- The best response is personal; model it before making decisions, and take regulated advice on anything you intend to act on.
For the official rules see gov.uk inheritance tax, and for free guidance MoneyHelper. Inheritance-tax and pension planning can be complex and interact, so consider a qualified, regulated financial adviser (and, for wills and estates, a solicitor) before acting.
This guide is general information, not regulated financial, tax or legal advice. The rules change and depend on your circumstances, so take regulated advice before acting on anything here.