UK Pension Death Benefits and IHT 2027: What Changes in April 2027?

For decades, defined contribution pension pots have been one of the most powerful IHT planning tools available to UK savers. Pensions sit outside your estate for Inheritance Tax purposes, meaning you could accumulate millions in a pension wrapper and pass it on completely free of the 40% IHT charge that applies to your other assets. That is about to change.

The October 2024 Budget announced that from April 2027, unused pension funds and death benefits will be brought within the scope of Inheritance Tax. This is one of the most significant pension tax changes in a generation.

How Pensions Work for IHT Today (Pre-April 2027)

Currently, a defined contribution (DC) pension pot falls outside your estate for IHT purposes. On death before age 75, uncrystallised pension funds can typically be passed to nominated beneficiaries free of income tax and IHT. On death after 75, benefits are still outside the estate for IHT but are subject to income tax in the hands of the beneficiary when drawn.

This has made pensions a preferred vehicle not just for retirement income, but for intergenerational wealth transfer. Many people with sufficient other income deliberately left their pensions untouched and drew on ISAs, savings, and property first -- a strategy often called "spend your ISA first, keep your pension for the kids."

What Changes from April 2027

From April 2027, pension funds remaining unused at death will be counted as part of the deceased's taxable estate for IHT. The mechanics are still being consulted on, but the broad framework announced by HMRC and HM Treasury is:

• Pension schemes will become liable for IHT on the remaining pension pot at death
• The scheme administrator (your pension provider) will be responsible for calculating and paying any IHT due from the pension fund before passing the remainder to beneficiaries
• The standard IHT nil-rate band (£325,000) and residence nil-rate band (£175,000) will still apply across the whole estate -- but pensions will now consume part of those allowances

The change affects defined contribution (DC) pensions -- SIPPs, workplace DC schemes, and personal pensions. Defined benefit (DB) pensions pay a spouse's pension on death and typically do not leave a lump sum to the estate, so they are less affected by this change in practical terms.

Who Is Most Affected?

The change primarily affects:

• People with large pension pots who were deliberately preserving them for inheritance
• Higher earners who have maximised pension contributions throughout their career
• Those who expected to live off other assets in retirement and leave the pension intact
• Families where the combined estate already exceeds the NRB + RNRB threshold (£500,000 single, £1,000,000 for married couples)

If your pension pot plus other estate assets are comfortably below the nil-rate band thresholds, the change may not create a direct tax bill -- but it will affect which assets in the estate are best to use first.

Planning Actions to Consider Now

1. Review your withdrawal strategy. If you previously planned to draw on non-pension assets first and leave the pension untouched, that calculus may change. Drawing down the pension (and potentially using the 25% tax-free cash entitlement) before death now means the funds leave the pension (where they will be subject to IHT from 2027) and are used or given away, potentially outside the estate via gifts.

2. Use the annual gift exemption. You can give away £3,000/year free of IHT, and gifts that survive seven years are fully exempt. If you use pension drawdown to fund these gifts, you are simultaneously reducing the pension pot and moving assets outside the estate.

3. Consider lifetime gifts and trusts. Larger transfers may benefit from careful trust structuring, but professional advice is essential as trust taxation is complex.

4. Check your nomination of beneficiaries. With pensions moving into the IHT calculation, the identity of beneficiaries and whether assets pass to a surviving spouse (who benefits from the spousal exemption -- IHT-free transfers between married couples and civil partners) becomes more important.

5. Think about the order of spending. ISAs and general investment accounts remain within your estate -- they always have been. From 2027, pensions will join them. This means the advantage of pensions over ISAs as inheritance vehicles is substantially reduced, and the decision of "which pot to spend first" becomes more nuanced.

6. Pension annual allowance use. The annual allowance is still £60,000/yr (or 100% of earnings). For most people, maximising pension contributions for retirement savings remains sensible -- the pension wrapper still offers income tax relief on contributions and tax-free growth. The IHT advantage on death is reduced but not eliminated (the nil-rate band still applies across the whole estate).

What We Still Do Not Know

As of mid-2026, HMRC is consulting on the technical mechanics. Key unresolved questions include:

• Exactly how scheme administrators will calculate and pay IHT from within the pension fund
• Whether there will be a transitional period or grandfathering for older pots
• How defined benefit death-in-service lump sums will be treated
• The interaction with existing IHT reliefs (spousal exemption, business relief)

The April 2027 implementation date is set in law, but secondary legislation will fill in many of the details. The situation warrants monitoring.

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Use our Inheritance Tax Calculator to model how the inclusion of your pension pot changes your estate's IHT position, and our Pension Calculator to plan your drawdown strategy before the 2027 change.