Pensions and Inheritance Tax: What Changes in April 2027

Most unused DC pension savings are not counted for inheritance tax. The pension provider has discretion over who receives the funds, so the money is treated as sitting outside the estate.

• Death before 75: beneficiaries receive the pension savings tax-free
• Death aged 75 or over: beneficiaries pay income tax on withdrawals, but no IHT applies
• DB pensions that pay survivor income: not usually subject to IHT

This is why pensions have been one of the most tax-efficient ways to pass on wealth. That changes from April 2027.

The core change: unused DC pension funds will be added to the estate value for IHT calculation purposes.

This includes:

• Self-invested personal pensions (SIPPs)
• Workplace DC pensions
• Personal pensions
• Lump sum death benefits from DC schemes
• Certain DB lump sum death benefits (may also be in scope)

Ongoing DB survivor pensions remain outside IHT. The Finance (No. 2) Act received Royal Assent, and HMRC published its consultation response in July 2025.

In practical terms: if someone dies after 6 April 2027 with unused DC pension savings, those savings will be added to their estate when calculating whether IHT is owed.

Several important exemptions continue to apply after April 2027:

• Spousal/civil partner exemption: pension death benefits passing to a surviving spouse or civil partner remain completely exempt from IHT
• Charity exemption: pension funds left to charity are exempt
• Death-in-service lump sums: excluded from the new rules
• Dependants' scheme pensions from DB: ongoing survivor pensions from defined benefit schemes remain outside IHT
• Ongoing annuity payments: not subject to IHT

The spousal exemption is particularly important. If your pension savings pass to your husband, wife, or civil partner, the new rules do not apply.

The government estimates:

• Around 10,500 estates will face a new IHT charge for the first time
• Around 38,500 estates will pay more IHT than they would under the current rules
• The average additional liability is approximately £34,000
• Expected revenue: £640 million in 2027/28, rising to approximately £1.46 billion by 2029/30

You are not affected if:

• Your total estate (including pensions) is below the IHT threshold
• Everything passes to your spouse or civil partner
• Your pension savings go to charity
• You only have DB survivor pensions (no unused DC funds)

For more on how inheritance tax thresholds and exemptions work, see our full guide.

One of the most controversial aspects of the new rules is the risk of double taxation on pension savings.

Death after age 75: IHT may apply at 40%, and beneficiaries then pay income tax when they withdraw the remaining funds. In the worst case:

• £200,000 pension pot
• IHT at 40% reduces it to £120,000
• Income tax at 40% on withdrawals reduces it to £72,000
• Effective combined rate: 64%

Death before age 75: IHT applies at 40%, but there is no income tax on withdrawals. The effective rate is 40%.

The government has acknowledged this double taxation issue but has not announced a mechanism to prevent it. This is a significant concern for families with larger pension pots.

The personal representative (executor or administrator) is responsible for the IHT on pension savings - not the pension provider. This was confirmed in the July 2025 consultation response, reversing the original October 2024 proposal.

The executor must:

• Identify all pensions held by the deceased
• Get valuations from each pension provider
• Include pension values in the IHT return to HMRC
• Arrange payment of any IHT due

There is a withholding mechanism: the executor can direct the pension administrator to withhold up to 50% of the pension fund for up to 15 months to help cover the IHT liability.

For a full overview of what executors need to do, see our probate guide (or confirmation in Scotland).

• DC workplace pensions: fully in scope - unused funds count towards the estate
• SIPPs: fully in scope
• Personal pensions: fully in scope if they are DC
• DB (defined benefit) pensions: largely exempt. Ongoing survivor pensions remain outside IHT, but DB lump sum death benefits may be caught by the new rules
• State Pension: not affected by these changes

If you are unsure what type of pension someone held, check with the pension provider. Our guide on pensions after death explains how to trace and claim pension benefits.

There are practical steps you can take before April 2027:

• Review your expression of wishes form: contact your pension provider and check who is nominated to receive your pension savings. Update it if your circumstances have changed
• Consider your wider estate plan: look at lifetime gifts, the spousal exemption, charitable giving, drawing down your pension during retirement, or purchasing an annuity
• Talk to a financial adviser: the interaction between pensions, IHT, and income tax is complex. Professional advice can help you understand your specific situation
• Keep records for your executor: list all pension providers with policy numbers and contact details. This saves significant time during administration

Our estate planning checklist covers all the key documents and decisions to get in order.

• Read our full guide on pensions after death for tracing and claiming pension benefits
• Understand the broader picture with our inheritance tax guide
• Get your affairs in order with our estate planning checklist
• Learn about the probate process: England & Wales or Scotland