The inherited pensions tax rules in 2027 will introduce one of the biggest changes to UK pension estate planning in recent years. From 6 April 2027, most unused pension funds and pension death benefits will be brought within a deceased person’s estate when calculating Inheritance Tax (IHT).
The change is now legislated through Finance Act 2026, which received Royal Assent on 18 March 2026. It applies to deaths occurring on or after 6 April 2027. Until then, many discretionary pension arrangements can generally pass to beneficiaries outside the estate for IHT purposes.
This does not mean every inherited pension will face a 40% tax charge. Normal Inheritance Tax allowances and exemptions will continue to apply, and the tax treatment can also depend on who receives the pension and the age of the pension holder when they die.
What Are the New Inherited Pensions Tax Rules From April 2027?
From 6 April 2027, most unused pension funds and death benefits will be treated as part of the deceased’s estate for Inheritance Tax purposes.
The change removes the existing distinction that often allows benefits from discretionary pension schemes to fall outside the estate. The rules can apply whether or not pension trustees have discretion over who ultimately receives the money.
The position can be summarised as follows:
| Pension inheritance | Before 6 April 2027 | From 6 April 2027 |
| Most unused defined contribution pensions | Usually outside estate for IHT | Usually included in estate |
| Certain pension death benefits | Often outside estate | Usually included |
| Death in service benefits | Usually outside estate | Remain excluded |
| Qualifying dependant’s scheme pension | Different treatment depending on arrangement | Excluded from new IHT rules |
| Pension left to qualifying spouse/civil partner | Usually IHT exempt | Normal spouse/civil partner exemption generally available |
HMRC states that most estates are still expected to have no Inheritance Tax liability, even after the pension reforms.
When Do the 2027 Pension Inheritance Tax Changes Start?
The new rules apply where the pension member dies on or after 6 April 2027.
This date is important. Someone dying on 5 April 2027 would generally be dealt with under the earlier pension IHT rules, while someone dying on 6 April 2027 falls within the new regime.
The changes were first announced at Autumn Budget 2024, consulted on during 2024 and 2025, and subsequently legislated through Finance Act 2026. HMRC is continuing to publish regulations and implementation guidance before the April 2027 start date.
Which Pensions Will Be Included in the Estate?
The legislation is designed to cover most unused pension wealth and pension death benefits.
Defined Contribution Pensions
Defined contribution arrangements are likely to be particularly important because they can contain substantial unused funds when somebody dies.
Examples include:
- Personal pensions.
- Self-invested personal pensions (SIPPs).
- Workplace defined contribution pensions.
- Unused drawdown funds.
Where an amount falls within the new rules, its value can be taken into account alongside assets such as property, savings and investments when determining the deceased’s estate for IHT.
Defined Benefit Pensions
Defined benefit schemes work differently because there is not normally an individual investment pot belonging to the member.
However, certain death benefits connected with a defined benefit arrangement can fall within the new regime. Other benefits, particularly qualifying dependant’s scheme pensions, are specifically excluded.
Overseas Pension Arrangements
The legislation can also affect certain qualifying non-UK pension schemes.
For long-term UK residents, HMRC says relevant pension property can be within the IHT regime regardless of where the pension scheme is established. Different rules can apply to people who are not long-term UK residents.
Which Pension Benefits Will Be Exempt From the New Rules?
Not every payment connected with a pension will become subject to Inheritance Tax.
Death in Service Benefits
Qualifying death in service benefits from registered pension schemes are excluded from the new IHT treatment.
These are typically payments made because an employee dies while still working for an employer, such as a lump sum calculated as a multiple of salary.
Dependants’ Scheme Pensions
Qualifying dependants’ scheme pensions are also excluded.
A dependant can include a surviving spouse or civil partner, children and, subject to the pension scheme and statutory requirements, certain people who were financially dependent on the deceased.
Certain joint-life annuity arrangements and some trivial commutation payments can also qualify as excluded benefits.
What Happens if a Pension Is Left to a Spouse or Civil Partner?
The fact that pension wealth will be included when valuing an estate does not automatically mean IHT will be payable.
Existing Inheritance Tax exemptions remain important.
Transfers between spouses and civil partners can normally qualify for the spouse or civil partner exemption, subject to the relevant residence rules. HMRC’s technical guidance confirms that pension schemes will still report the pension value, but the personal representatives can claim the applicable exemption.
This could create a substantial difference between leaving pension wealth to a spouse and leaving it directly to adult children.
For example, a £400,000 pension inherited by a qualifying spouse could be included when reporting the estate but may qualify for the spouse exemption. If the same pension passes to adult children, its value may instead contribute towards an IHT liability.
How Much Inheritance Tax Could Apply to an Inherited Pension?
The standard UK Inheritance Tax rate is 40% on the part of an estate above the available tax-free thresholds after considering exemptions and reliefs.
The main nil-rate band remains £325,000.
A further residence nil-rate band of up to £175,000 may be available when a qualifying home passes to direct descendants. The residence allowance starts to taper where an estate exceeds £2 million. These thresholds are currently legislated to remain at their present levels through the relevant 2027 period.
A qualifying individual can therefore potentially have:
| IHT allowance | Maximum amount |
| Nil-rate band | £325,000 |
| Residence nil-rate band | £175,000 |
| Potential individual total | £500,000 |
| Potential qualifying married/civil-partner estate using transferred allowances | Up to £1 million |
Whether the full allowances are actually available depends on the circumstances of the estate.
How Could the New Pension Rules Affect an Estate?
Consider a simplified example.
Suppose someone dies after 6 April 2027 with:
- £325,000 of other taxable assets.
- £200,000 remaining in a pension.
- No spouse exemption.
- No residence nil-rate band or other reliefs.
- A full £325,000 nil-rate band available.
Under the new rules, the pension can increase the estate considered for IHT purposes to £525,000.
After the £325,000 nil-rate band, £200,000 would remain exposed to IHT.
At the standard 40% rate, that could produce an illustrative £80,000 IHT liability.
Actual calculations can be more complicated because estates may contain exempt beneficiaries, transferable allowances, gifts, property reliefs and several different pension beneficiaries.
Will Beneficiaries Also Pay Income Tax on an Inherited Pension?
Potentially, yes.
The 2027 Inheritance Tax changes do not abolish the existing Income Tax rules for inherited pensions.
The pension holder’s age when they die remains particularly important.
If the Pension Holder Dies Before Age 75
Inherited defined contribution pension benefits can generally be received free of Income Tax where the relevant conditions are satisfied.
For lump sums, the deceased’s lump sum and death benefit allowance and the two-year payment rules can also affect whether tax is due.
If the Pension Holder Dies at Age 75 or Older
Inherited pension withdrawals and many lump-sum death benefits are generally taxable as the beneficiary’s income.
The amount of tax therefore depends on the beneficiary’s marginal Income Tax rate.
| Age at death | Typical Income Tax treatment |
| Under 75 | Many qualifying inherited benefits can be tax-free |
| 75 or older | Benefits are generally taxable at beneficiary’s applicable Income Tax rate |
These Income Tax rules operate separately from the new IHT calculation.
Could an Inherited Pension Face Both IHT and Income Tax?
This is one of the most important issues surrounding the 2027 rules.
A pension inherited from someone aged 75 or over could potentially fall within the estate for Inheritance Tax and also generate Income Tax when the beneficiary receives the money.
However, legislation includes measures designed to prevent the same amount used to pay IHT from also being treated as taxable pension inco
HMRC’s May 2026 technical guidance states that where IHT has been paid in relation to pension death benefits, the portion corresponding to that IHT and related interest will not count towards the beneficiary’s taxable pension income.
The interaction can still be complicated, particularly for higher-rate taxpayers, so beneficiaries should not assume that the headline 40% IHT rate represents the total possible tax consequences.
Who Will Be Responsible for Paying the Pension Inheritance Tax?
The deceased’s personal representatives, usually the executors or administrators of the estate, will be primarily responsible for reporting the pension and paying the Inheritance Tax due.
This is different from the government’s original proposal, under which pension scheme administrators would have had primary responsibility. The proposal was changed following consultation.
Once a beneficiary becomes entitled to pension property, the beneficiary can also become jointly and severally liable for the IHT attributable to that pension entitlement.
Personal representatives will therefore need to identify all relevant pension arrangements before completing the estate’s IHT administration.
Can the Pension Provider Pay the Inheritance Tax Directly?
Yes, a new mechanism is being introduced to deal with situations where the estate does not have enough accessible cash to pay the tax.
Under the Pensions Direct Payment Scheme, personal representatives or pension beneficiaries can issue an appropriate payment notice requiring a registered pension scheme administrator to pay IHT and relevant interest directly to HMRC from pension funds that remain available within the scheme.
Where IHT may be due, personal representatives will also have powers to instruct pension providers to withhold up to 50% of certain pension benefits temporarily.
The withholding arrangement can generally remain in place for up to 15 months after the relevant death period, although it should end earlier once the tax position has been resolved.
This system is intended to stop executors from having to fund pension-related IHT entirely from other estate assets while pension money is being distributed elsewhere.
Will Pension Beneficiaries Have to Wait Longer for Their Money?
In some taxable estates, pension administration could take longer after April 2027.
Executors may need to:
- Identify every pension held by the deceased.
- Contact each pension scheme.
- Obtain a valuation.
- Establish which beneficiaries are exempt and non-exempt.
- Calculate the total estate value.
- Determine whether IHT is payable.
- Arrange payment before completing parts of the estate administration.
HMRC expects pension schemes generally to provide requested pension valuations within 28 days, although estimated values can sometimes be supplied initially.
Most estates will not require pension withholding, but estates facing IHT could experience additional administration.
Should People Review Their Pension Beneficiary Nominations Before 2027?
Reviewing pension nominations can still be sensible.
An expression of wish or beneficiary nomination remains relevant because pension trustees can consider it when deciding who should receive discretionary death benefits. However, trustee discretion will no longer, by itself, keep pension assets outside the IHT regime after April 2027.
People approaching retirement may therefore want to review their wider estate planning rather than considering pensions in isolation.
This could include reviewing:
- Pension beneficiary nominations.
- Wills.
- Spouse or civil partner planning.
- Estimated total estate value.
- Available nil-rate bands.
- Existing lifetime gifts.
- Drawdown strategy.
- Life insurance arrangements.
Large estates or estates involving trusts, overseas assets or several pensions may warrant regulated financial, tax or legal advice.
Does It Still Make Sense to Leave Money Inside a Pension?
The answer will increasingly depend on individual circumstances.
Historically, keeping surplus wealth inside a defined contribution pension could be particularly attractive for estate planning because many discretionary pension benefits could pass outside the estate for IHT.
From April 2027, that advantage will be significantly reduced.
Pensions will nevertheless retain major benefits during a person’s lifetime, including tax-relieved contributions, tax-advantaged investment growth and the ability to provide retirement income. The reforms are specifically aimed at changing their treatment on death rather than removing the wider tax advantages of pension saving.
It would therefore be risky to withdraw pension funds solely because of the 2027 change without considering the Income Tax consequences, investment position, future retirement needs and wider estate.
What Should Families Do Before the New Rules Begin?
The first step is understanding the size of the potential estate including pension wealth.
Families with significant pension balances may want to calculate what their estate could look like if death occurred after 6 April 2027 rather than relying on the old assumption that pensions sit completely outside IHT.
Particular attention may be needed where:
- Pension wealth is substantial.
- The estate is already close to £325,000 or £500,000.
- Total wealth is above £2 million.
- Children rather than a spouse will inherit pensions.
- The pension holder is aged 75 or older.
- There are several pension schemes.
- Overseas pensions are involved.
- Beneficiary nominations have not been reviewed for years.
The key change is straightforward: from 6 April 2027, pensions can no longer automatically be treated as separate from the estate when planning for Inheritance Tax. Most estates are still expected to pay no IHT, but households with substantial property, investments and unused pension wealth could face a materially different tax position.
Because the legislation is now in place but HMRC is continuing to publish detailed implementation guidance ahead of April 2027, estate plans should be reviewed against the latest official rules before major financial decisions are made.
FAQs
Will inherited pensions be subject to Inheritance Tax from 2027?
Yes. From 6 April 2027, most unused pension funds and pension death benefits will be included in the deceased person’s estate when calculating Inheritance Tax.
What is the Inheritance Tax rate on inherited pensions?
The standard Inheritance Tax rate is 40% on the taxable portion of an estate above the available allowances and exemptions.
Will a spouse pay Inheritance Tax on an inherited pension?
Usually not. Pension benefits passing to a qualifying spouse or civil partner can normally benefit from the existing spouse or civil partner IHT exemption.
Are inherited pensions tax-free if someone dies before age 75?
They can often be received free of Income Tax if the pension holder dies before 75 and the relevant conditions are met, although the pension may still be considered for IHT from April 2027.
What happens if the pension holder dies after age 75?
Beneficiaries will generally pay Income Tax on pension withdrawals at their applicable tax rate, while the pension may also form part of the deceased’s estate for IHT purposes.
Are death-in-service benefits included in the 2027 pension tax changes?
Qualifying death-in-service benefits from registered pension schemes are generally excluded from the new Inheritance Tax treatment.
Should pension beneficiary nominations be reviewed before April 2027?
Yes. Reviewing pension nominations, wills and wider estate planning can help ensure arrangements still reflect the person’s wishes under the new tax rules.
