⚠️ Educational Content Only: This article is for educational and informational purposes only and does not constitute legal, tax, financial, or estate planning advice. Savvy Investor Guide is not a regulated firm and does not provide personalised advice. The pension inheritance tax rules described here are based on the draft Finance Bill 2025-26 and HMRC guidance current as of May 2026. The legislation remains subject to parliamentary approval and further detail before 6 April 2027. Estate planning depends on individual circumstances including marital status, residency, asset composition, and family situation. Before making decisions, consult a qualified solicitor and a regulated financial adviser.
Pension Inheritance Tax 2027: UK Estate Planning Guide
On 6 April 2027, the UK pension regime gets its biggest shake-up since the 2015 freedoms. From that date, most unspent defined contribution pension pots get pulled into your estate for inheritance tax purposes. The government estimates that 10,500 estates will face an IHT bill for the first time, and another 38,500 will pay more than they otherwise would, with an average increase of around £34,000 per affected estate. If you have a SIPP, a workplace DC pension, or any pot you’d planned to leave to your children, your estate plan needs a second look. The deadline is still about eleven months away, but the planning moves take time to set up properly.
What’s New for 2027
- From 6 April 2027, most unused defined contribution pension funds and lump-sum death benefits become part of the deceased’s estate for inheritance tax. They aggregate with everything else you own, and if the total exceeds your nil-rate bands the excess is taxed at 40%.
- Personal Representatives (your executors) are responsible for reporting and paying the IHT on the pension component. The original proposal made pension scheme administrators liable, but the consultation flipped that.
- The new Pension Inheritance Tax Payments Scheme lets PRs instruct the pension scheme to pay IHT directly to HMRC, or to withhold up to 50% of taxable benefits for up to 15 months while the position is sorted out.
- Income tax double-tap relief: where the pension holder dies after 75, the draft regulations prevent income tax being charged on the portion of death benefits already used to pay IHT. Combined effective rates can still reach 64-67% in the worst cases.
- The IHT thresholds stay frozen at £325,000 (NRB), £175,000 (RNRB), and £2 million (taper threshold) until April 2031, confirmed at Budget 2025. Fiscal drag does the heavy lifting alongside the pension change.
Contents
- What’s actually changing on 6 April 2027
- The IHT thresholds: who’s in scope
- Worked examples: who pays more
- The income tax double-tap (deaths after 75)
- What’s not affected
- The new admin process and your executors
- Six planning moves to consider before April 2027
- The self-employed angle: business owners and KDP authors
- UK expats: the cross-border twist
- Frequently Asked Questions
What’s actually changing on 6 April 2027
The current rule, until 5 April 2027: most defined contribution pensions sit outside your estate. When you die, the scheme trustees use their discretion to pay the unused pot to your nominated beneficiaries. Because no one had a fixed legal right to those funds, they don’t form part of the estate, and there’s no IHT to pay. Pensions have been one of the most tax-efficient ways to transfer wealth between generations for the better part of a decade.
The new rule, from 6 April 2027: most unspent DC pension funds and lump-sum death benefits are brought into the estate’s IHT valuation. They get aggregated with everything else you own, and if the total exceeds your nil-rate bands, the excess is taxed at 40%. Whether the scheme administrator has discretion over payment no longer matters. Whether you nominated a beneficiary still matters for who receives the money, but it doesn’t shelter the pot from IHT.
The government’s stated rationale, set out in the official policy paper on GOV.UK, is to remove the distortion that had pensions being marketed as a wealth-transfer tool rather than a retirement income vehicle. Whether you agree with the rationale or not, the policy is now confirmed in the draft Finance Bill 2025-26 and implementation is set for 6 April 2027.
The numbers in plain English: HMRC estimates that of the roughly 213,000 estates with inheritable pension wealth in 2027/28, around 10,500 will become liable for IHT for the first time. Another 38,500 will pay more than they would have. The average IHT increase per affected estate is approximately £34,000. For more than half of affected estates, the pension component represents less than 5% of the net estate value.
The IHT thresholds: who’s in scope
Three numbers do most of the work in inheritance tax, and all three are frozen until April 2031, confirmed at Budget 2025:
- The nil-rate band (NRB): £325,000 per person. The slice of an estate that passes IHT-free, available against any asset type.
- The residence nil-rate band (RNRB): £175,000, available when a qualifying home passes to direct descendants (children, grandchildren, including step-, adopted, and foster children).
- The RNRB taper threshold: £2 million. Above that line, you lose £1 of RNRB for every £2 the estate exceeds the threshold. The RNRB is fully gone at £2.35 million for an individual, or £2.7 million for a couple using a transferred RNRB.
These thresholds have been frozen since 2009 (NRB) and 2020 (RNRB). According to HMRC’s published guidance, the freeze now extends to the 2030/31 tax year, having been extended again in the November 2025 Budget. The current legislative default is that they would rise with CPI from 2031 onwards, but recent history suggests another extension is more likely than not.
What couples can shelter, in practice:
Above the available threshold, the rate is 40%. There’s a reduced 36% rate if at least 10% of the net estate is left to charity.
The kicker is what fiscal drag does to those numbers over the next five years. Property values grow. Pension pots grow. The thresholds don’t. Estate values that comfortably duck under the limit in 2026 may produce a sizeable IHT bill by 2030 even with the same will. Throw the new pension rule into that mix from April 2027 and you have a meaningful number of UK households crossing the IHT threshold for the first time.
Worked examples: who pays more
Three illustrative cases, all simplified, none of them advice. The maths tells the story better than any general explanation can.
David: single, modest house, decent pension
- House: £400,000
- Cash and ISAs: £30,000
- DC pension pot: £200,000
- Other: nil
Under the current rules: estate = £430,000 (pension excluded). NRB £325,000 + RNRB £175,000 = £500,000. No IHT due.
Under the April 2027 rules: estate = £630,000 (pension included). Threshold available = £500,000. Excess = £130,000. IHT = £52,000.
The pension change creates a tax bill where there was not one. David’s beneficiaries receive £52,000 less than they would have on a death just one day earlier.
Emily: single, no qualifying home, large pension
- DC pension pot: £700,000
- Other assets: £800,000
- House: rented, no qualifying property to pass to descendants
Under the current rules: estate = £800,000 (pension excluded; no qualifying home so no RNRB). Threshold = £325,000. IHT = (£800,000 − £325,000) × 40% = £190,000.
Under the April 2027 rules: estate = £1,500,000. Same threshold available (£325,000). IHT = (£1,500,000 − £325,000) × 40% = £470,000.
Emily’s family loses an additional £280,000 to the new rule. The lack of a qualifying home transfer means there is no RNRB to soak up some of the impact, so the pension inclusion hits at the full 40% rate.
Susan: couple, £2M+ estate, RNRB taper bites
- House: £900,000
- Investments outside ISAs and pensions: £1,100,000
- DC pension: £700,000
- Spouse’s nil-rate bands transferred at first death
Total estate after second death: £2,700,000. Under current rules without the pension counted: £2,000,000, where the RNRB taper just begins. Under the new rules: £2,700,000, which is past the £2.7 million ceiling at which the transferred RNRB is fully tapered away.
The pension inclusion has done two things at once: lifted the estate above the taper line, and removed an extra £175,000 of RNRB. This is where the numbers get genuinely punishing. Estates near or above the £2 million threshold need to think carefully about how the pension inclusion will interact with the RNRB taper, because losing RNRB at the top end is more expensive than the headline 40% rate suggests.
The income tax double-tap (deaths after 75)
This is the part most general coverage glosses over. Two taxes are potentially in play on an inherited pension after April 2027:
- IHT at 40% on the pension component, charged to the estate.
- Income tax at the beneficiary’s marginal rate (up to 45%) when they draw the funds, which has always applied for deaths after age 75.
Without relief, those layer on top of each other. Take a £100,000 pension inherited by a higher-rate taxpayer where the pension holder dies at age 78. A 40% IHT charge leaves £60,000 in the pot. The beneficiary then pays 40% income tax on drawdown, leaving £36,000. That is a 64% effective tax rate. For an additional-rate taxpayer (45% marginal), the combined effective rate climbs to roughly 67%.
The draft Finance Bill 2025-26 includes a relief that softens this. Per the draft regulations published on GOV.UK, any IHT paid on the pension funds is deducted from the value treated as taxable income on subsequent drawdown. So in practice the bill is meaningfully smaller than naive layering suggests. But “meaningfully smaller than catastrophic” is still very high. Pension wealth that was passing tax-free in 2026 will not pass tax-free in 2027.
For deaths before age 75, the pension income to beneficiaries has historically been tax-free, and that position broadly continues under the new rules. The IHT charge applies, but the income tax position on subsequent drawdown is unchanged. So the under-75 case is “just” the 40% IHT hit, not the double tap.
Worked example of the double-tap: £100,000 inherited pension, holder dies at 78, beneficiary is a higher-rate taxpayer. IHT at 40% = £40,000. Pension net of IHT = £60,000. Income tax relief: the beneficiary is taxed only on the £60,000 not on the original £100,000. At 40% marginal income tax that is £24,000. Total tax: £64,000. Net to family: £36,000. Effective combined rate: 64%.
What is not affected
Several things stay outside the scope of the new rule. These are the carve-outs worth knowing about, because for many households one or more of them will materially change the planning conversation.
- Spousal and civil partner transfers. Anything left to a spouse or civil partner is still IHT-free, with no upper limit. The pension being part of the estate does not change this. A surviving spouse can inherit the entire pot with no IHT to pay. The IHT bill, if any, lands on the second death.
- Charitable giving. Pension funds left to a registered charity remain IHT-free, and the existing 36% reduced rate (where 10% or more of the net estate passes to charity) continues. The charity exemption that already applied to non-pension assets is now extended to pensions.
- Death-in-service benefits. Group life cover provided through pension schemes is excluded from estate valuation entirely. This includes both discretionary and non-discretionary schemes, and applies to public sector schemes that previously had to be brought in. So a typical workplace life-assurance benefit paid as a multiple of salary is unaffected.
- Defined benefit pensions in payment. A DB pension that is already paying you an income is not a “pot.” There is nothing to inherit and nothing to value for IHT. Spouse pensions and dependants’ scheme pensions from DB schemes are also out of scope.
- Joint life annuities. Already in payment, no pot, excluded from the new rules. The continuing annuity income to the surviving partner is not subject to IHT.
- The 25% tax-free cash (PCLS). The lump sum you can take from age 55 (rising to 57 in 2028) is unaffected. The lifetime cap remains £268,275.
- State Pension. No pot, no inheritance, no change. State Pension remains a personal entitlement that ceases on death.
The pattern across these exemptions: anything that is structurally an income stream rather than a pot, anything that goes to a spouse or civil partner, and anything that goes to charity stays outside the new rule. The rule bites on capital sums passing to non-spouse beneficiaries.
The new admin process and your executors
This is where the rule gets practical for the people who will actually deal with your estate.
Under the new system, Personal Representatives (your executors or administrators) become responsible for reporting and paying IHT on the pension component. The original consultation suggested putting this duty on pension scheme administrators (PSAs), but the practical objections were obvious. Schemes do not know who is handling the rest of the estate, do not have contact details for beneficiaries, and may not even hear about a death for months. After feedback, the duty stays with PRs. The consultation summary on GOV.UK sets out the full reasoning.
To make that workable, HMRC has set up the Pension Inheritance Tax Payments Scheme. Three things matter about it:
Direct payment route
PRs (or beneficiaries) can instruct the pension scheme to pay the IHT on the pension component directly to HMRC, rather than having the funds pass through the estate first. Scheme must settle the tax within 35 days of receiving a valid request.
50% withholding notice
PRs can issue a “withholding notice” requiring the scheme to hold back up to 50% of the taxable benefits for up to 15 months from the end of the month of death. Spouses, civil partners, charities, and registered clubs can still receive their full benefit.
Six-month deadline
Standard IHT rules continue to apply. Tax is due 6 months after the end of the month of death. Estates with limited liquid assets may need tailored payment plans, especially where most of the estate is locked in pension and property.
The practical implications:
Nominate beneficiaries clearly, but understand what nomination forms now do. They affect who receives the money. They do not shelter the pot from IHT. A nomination form to your daughter still triggers the pension going to her, but she or the estate still owes IHT on the inherited portion.
Liquidity planning matters more than ever. The IHT is due 6 months after the end of the month of death. If 60% of an estate is locked in property and pension, the family needs a clear path to actually paying the bill on time. The withholding notice mechanism helps, but it puts a 15-month timer on resolution.
Tell your executors which pensions you have. One of the most common probate problems is missing pensions. Old workplace schemes from jobs you held twenty years ago. Personal pensions started in your twenties. The Pension Tracing Service exists for a reason. A simple list kept with your will, and updated annually, saves your executors weeks of work and removes the risk of HMRC discovering a pot after clearance has been given.
Six planning moves to consider before April 2027
Not all of these will fit every situation. The point is that doing nothing is itself a choice, and these are the levers that estate planners and IFAs are pulling. Read them as starting points for a conversation with your own adviser, not as a checklist to action this afternoon.
1. Spend the pension in retirement, not after it
The simplest answer to the new rule is to use the pension the way the policy is now nudging you to: for retirement income. Drawing down systematically over your retirement years, instead of leaving the pot untouched as a wealth-transfer vehicle, removes the IHT exposure on those drawn-down amounts. The trade-off is income tax on the withdrawals during your lifetime, but at potentially lower rates than the combined 40% IHT plus income tax your beneficiaries would face. This is particularly worth modelling if you are over 75 and sitting on a large pot you do not actively need for spending.
2. Annuitise some of the pot
Buying an annuity converts a pension pot into a guaranteed lifetime income stream. There is no “pot” left to inherit, so no IHT exposure on the converted portion. Joint-life annuities pay out to a surviving spouse or civil partner without IHT. This is not right for everyone. It removes flexibility, locks in current rates, and forfeits any further growth on the converted capital. But for people approaching 75 with significant pension wealth they do not need for spending, it is a meaningful planning option that has been getting more attention since the rules were confirmed.
3. Lifetime gifting
Gifts made to individuals more than seven years before death fall outside the IHT estate entirely. Gifts within seven years are subject to taper relief on the rate of tax. This was always a useful tool, and it gets more useful when pensions are also in scope. The smaller routine exemptions all still apply: £3,000 annual exemption, gifts from surplus income (which is its own potentially powerful tool for higher-earning retirees), wedding gifts up to £5,000 to a child, and small gifts under £250 per recipient. MoneyHelper has a clear summary of the gifting rules. Gifts from surplus income, in particular, can be a steady drip-feed of pension drawdown to children that never enters the seven-year clock at all, provided you maintain your standard of living from other sources.
4. Charitable giving
Pensions left to a registered charity are IHT-free, and the 36% reduced IHT rate on the rest of the estate kicks in if at least 10% of the net estate goes to charity. For estates where charitable giving was already part of the plan, routing it specifically through the pension is now more tax-efficient than other assets. The pension is the asset that gets hit hardest by the new rule, so giving it to charity rather than pulling charity from elsewhere preserves more of the rest of the estate for family. This is a structural change worth revisiting with whoever drafted your will.
5. Reconsider beneficiary structure
Leaving the pension to a non-spouse, especially adult children, is where the new rule bites hardest. For couples, the spousal exemption means the first-death position is unchanged. It is the second death that triggers the tax. One thing specialist advisers are now revisiting: whether to use both spouses’ nil-rate bands more aggressively at the first death, rather than relying entirely on the spousal exemption and pushing everything to the second death. The right answer depends entirely on the size of the estate and the assets involved, but it is no longer automatic that “leave it all to the spouse” is the most tax-efficient route.
6. Look at the whole estate, not just the pension
The new rule pulls the pension into the IHT calculation, but the bands apply to the whole estate. A house worth £600,000, ISAs worth £150,000, and a pension worth £200,000 together cross the threshold. The same household with £400,000 of equity release on the property does not. Equity release, downsizing, asset structuring, and CGT planning all interact with the new pension treatment. Our tax-loss harvesting guide covers the CGT side for non-pension assets, which is the other moving piece in 2026/27 UK tax planning.
One honest caveat: estate planning at this scale is genuinely outside the do-it-yourself zone. A solicitor and a financial adviser working together, with a clear picture of pension, property, savings, and household goals, will produce better answers than any blog post can. The aim of this piece is to make sure you walk into those conversations knowing what has changed, not what to do. The cost of professional advice is a fraction of the cost of getting an £800,000 estate plan wrong.
The self-employed angle: business owners and KDP authors
If your pension was funded by self-employment or business income, freelance work, consulting, a small ltd, or KDP author royalties paid into a SIPP, the change applies to the whole pot. Self-employed pension contributions have been one of the most useful tools in the UK tax code for two decades, and that piece is not going away. The in-life tax relief is still excellent. But the long-term destination of the money has changed.
KDP authors are an interesting case. The standard playbook for years has been: pay corporation tax (or income tax for sole traders) on royalty income, funnel surplus into a SIPP for the tax relief on the way in and the IHT shelter on the way out, draw down sensibly in retirement, leave the residue to family. The “leave the residue to family” bit no longer works as a tax-efficient transfer from April 2027 onwards. If you are working with a publishing service like Heppe Smith Publishing on building a self-publishing business, the SIPP-as-tax-shelter logic still works during accumulation; only the post-death position changes.
The practical adjustment for self-employed pension savers is usually a two-pot mindset. Continue funding the pension during accumulation because the in-life tax relief is genuinely excellent. But plan to actually use the pot during retirement, not treat it as a permanent estate asset. The maths is just different from 2027 onwards. For business owners, the related question is whether to draw more from the company in dividend or salary form during your working years, paying the income tax now, and use the gross income to fund alternative IHT-friendly assets, rather than maxing the pension and locking the wealth behind the new rule.
The wider business-owner conversation also touches what to do with company shares (Business Property Relief, capped at £1 million from April 2026 at the 100% rate), gifting strategies for working children, and the timing of any sale or wind-down. Pension is one piece of that picture, not the whole picture, and the new rule rebalances how much of your IHT planning should sit inside the pension versus outside it.
UK expats: the cross-border twist
For UK residents who have moved abroad, or are considering it, the pension IHT treatment depends on UK tax residency at death and the new long-term residence rules, not simply on where you happen to be living when you die.
If you are a long-term UK resident under the rules that replaced domicile from 6 April 2025, your worldwide estate is in scope of UK IHT, including UK pensions wherever you happen to be living. Long-term resident status broadly applies once you have been UK-resident for 10 of the last 20 tax years, with a tail period that keeps you in scope after you leave.
If you have genuinely cut UK tax residency for an extended period, typically beyond 10 years, then non-UK assets may fall outside the scope of UK IHT. UK-source assets like a UK property or a UK pension scheme typically remain within the UK net regardless. For people who have moved to Cyprus, Spain, Portugal, or similar destinations, the local tax position on inherited UK pensions also matters and varies sharply by country.
The old expat playbook of “leave the SIPP, draw the ISA” was tidy because the SIPP sat outside IHT. From April 2027 it does not, and the ordering of which assets to draw down in expat retirement may need to flip. For people who have moved or are planning to move, this is a conversation to have with a cross-border tax specialist before April 2027 rather than after. For more on the practical mechanics of UK retirement abroad, see our guide to living in North Cyprus, which covers the tax and lifestyle picture in detail for one popular UK retirement destination.
📚 Where to Go Next
Pension IHT is one part of a wider 2026/27 UK tax shake-up. These are the related pieces worth reading.
Frequently Asked Questions
Does the change affect deaths before 6 April 2027?
No. The new rules apply to deaths on or after 6 April 2027 only. If a pension holder dies on 5 April 2027 or earlier, the existing IHT treatment applies and the unused pension typically passes to nominated beneficiaries outside the IHT estate. Deaths on or after 6 April 2027 fall under the new rules. There is no transitional period or phase-in.
What if my spouse inherits the pension first?
Inheritances passing to a spouse or civil partner remain IHT-free, with no upper limit. The pension being part of the estate does not change the spousal exemption. So on the first death, no IHT is due on the pension. The IHT exposure typically arises on the second death, when the pension passes from the surviving spouse to the next generation. For couples, the practical question is what happens at the second death, and how to use both spouses’ nil-rate bands efficiently across both deaths.
Are joint life annuities affected?
No. Joint life annuities are out of scope of the new rules. They are categorised as continuing annuities (income for a surviving partner) rather than a transfer of wealth. The continuing annuity income to the surviving partner is not subject to IHT, and there is no pot to value at the first death. Single-life annuities also are not affected because there is nothing to inherit when the annuitant dies.
What about the 25% tax-free lump sum (PCLS)?
The pension commencement lump sum, capped at £268,275 lifetime, is unaffected by the new rules. You can still take 25% of your pension pot tax-free from age 55 (rising to 57 in April 2028). Taking the PCLS during your lifetime moves that money out of the pension wrapper, where it can then be spent, gifted, or held in other assets that already form part of the estate.
Do I need to update my will?
Probably not for the pension change itself, since pensions are typically not dealt with in your will but through a separate beneficiary nomination form held by the pension scheme. But the new IHT exposure on pensions makes the wider estate plan worth reviewing. The interaction between the will, the pension nomination forms, the residence nil-rate band rules (which require a qualifying home to pass to direct descendants), and any trusts in the will is where most of the planning value lies. A solicitor who specialises in wills and probate is the right starting point.
Can I just give the pension to charity?
Yes. Pension funds left to a UK-registered charity remain IHT-free. The charity exemption that already applied to non-pension assets is being extended to pensions under the new rules. If at least 10% of the net estate is left to charity, the IHT rate on the rest of the estate drops from 40% to 36%. For estates where charitable giving was already part of the plan, routing it through the pension specifically is now usually more tax-efficient than other routes, because the pension is the asset that would otherwise be hit hardest by the new rule.
How is this different for defined benefit pensions?
Defined benefit (DB) pensions in payment, where you are receiving a fixed income for life, are not “pots” and do not have a value to be inherited. They are not affected by the new rules. Spouse pensions and dependants’ scheme pensions paid from DB schemes after the member’s death are also out of scope. The new rules primarily affect defined contribution (DC) pensions: SIPPs, personal pensions, workplace DC schemes, and similar pots that have not been annuitised. Some hybrid arrangements may have both DB and DC components, and only the DC component would be in scope.
What if my estate is below £325,000?
You will not pay IHT, with or without the pension change. The nil-rate band of £325,000 covers the whole estate. The new rules only matter for estates that exceed the available IHT thresholds. The government estimates that more than 93% of UK estates will continue to have no IHT liability after April 2027. The rules bite primarily on estates with significant pension wealth, large property values, or both. If your estate is well under the £325,000 nil-rate band even with the pension included, the new rules are not a planning concern.
Last Updated: 2 May 2026
Sources: GOV.UK draft Finance Bill 2025-26 and Inheritance Tax policy papers; HMRC consultation responses; Royal London, Standard Life, and People’s Pension industry guidance; House of Commons Library briefing on Inheritance Tax.
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