UK Inheritance Tax on Pensions: What Changes from April 2027

For decades, defined contribution pension pots have sat outside your estate for inheritance tax purposes. That has made pensions one of the most powerful wealth-transfer vehicles available to UK savers. From April 2027, the rules change significantly. Unspent pension funds will be drawn into your estate, potentially triggering a 40% IHT charge on top of income tax your beneficiaries already pay. Here is what you need to know and what you can do between now and then.

The Current Rules (Until April 2027)

Under the current system, most defined contribution pensions pass free of inheritance tax. If you die before age 75, your beneficiaries typically receive the funds completely tax-free. If you die at 75 or older, they pay income tax at their marginal rate when they draw the money down -- but there is no IHT.

This arrangement has encouraged many savers to treat their pension as a legacy vehicle, spending other assets first and leaving the pension pot intact for children or grandchildren. It has been particularly attractive for wealthier savers who do not need the pension for retirement income.

What Changes from April 2027

From 6 April 2027, unspent defined contribution pension funds will be included in your estate for IHT purposes. The standard IHT nil-rate band (NRB) of GBP 325,000 and the residence nil-rate band (RNRB) of GBP 175,000 will still apply, but your pension pot will now count towards the total taxable estate.

The 40% IHT rate applies to the value of your estate above those thresholds. If you leave 10% or more of your net estate to charity, a reduced rate of 36% applies.

The government has also confirmed that pension scheme administrators will be responsible for reporting pension assets and paying any IHT due directly to HMRC. Beneficiaries will then inherit the net-of-IHT pension value, and income tax will still apply when they draw funds down. This double-tax exposure -- 40% IHT followed by up to 45% income tax -- creates an effective combined charge that can exceed 60% in the worst cases.

A Practical Example

Suppose your estate on death includes a home worth GBP 500,000, savings of GBP 100,000 and an unspent pension pot of GBP 300,000, giving a total of GBP 900,000. You are married and your spouse has already died, so you have the full combined NRB of GBP 650,000 and combined RNRB of GBP 350,000 if the home passes to children.

Under the current rules, the GBP 300,000 pension sits outside IHT. Under the 2027 rules, the full GBP 900,000 counts. Even with the combined allowances of GBP 1,000,000 in this example, the tax position shifts meaningfully for estates where allowances are lower or the pension is larger.

For a single person with no transferable allowances, the NRB is GBP 325,000 and RNRB is GBP 175,000, giving GBP 500,000 free. A GBP 900,000 estate would face 40% IHT on GBP 400,000 -- a bill of GBP 160,000.

Planning Steps to Take Now

Draw pension income strategically. If you do not need pension funds for day-to-day spending, consider whether drawing down and spending from savings makes more sense than leaving the pension intact. The calculus has changed.

Review your nomination forms. Spousal transfers remain IHT-exempt. Passing a pension to a surviving spouse or civil partner does not trigger IHT, so keeping nominations up to date is essential.

Consider charitable giving. If your estate is above the thresholds, a charitable legacy of 10% of the net estate reduces the IHT rate from 40% to 36%.

Explore gifting. Annual exemptions (GBP 3,000 per year) and potentially exempt transfers (which become fully exempt after seven years) can reduce the taxable estate over time.

Check your pension Annual Allowance headroom. Making additional contributions before 2027 could shift money into the pension for near-term retirement use, freeing up other assets for gifting.

Take professional advice. These changes interact with income tax, CGT and trust law in complex ways. An independent financial adviser or solicitor with estate planning expertise can model the best outcome for your specific situation.

Defined Benefit and State Pension

These changes apply to defined contribution pots. Defined benefit (final salary) pensions typically pay a spouse's pension on death and do not generate a transferable lump sum. The State Pension (currently GBP 12,548 per year for a full new State Pension) is not an asset that can be inherited and is unaffected.

Act Before April 2027

You have time. The reforms do not take effect until April 2027, and the legislation is still moving through Parliament. But waiting until the last moment to review your pension strategy is rarely wise. If your pension pot is substantial and your estate is above the IHT thresholds, starting the conversation with an adviser now gives you the most options.

Use the CalcHub pension calculator to model your retirement income needs and see how much of your pot you are likely to use before death: https://calchub.uk/calculators/pension