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Pensions and Inheritance Tax: what the April 2027 changes could mean for your estate
September 30, 2026
For decades, pensions have sat quietly outside the reach of Inheritance Tax. However, from 6 April 2027, most unused pension funds and death benefits will be brought into the value of your estate for Inheritance Tax purposes, following confirmation of the reform in the Finance Act 2026.
If you have meaningful pension savings, you should understand what is changing, why, and what you can realistically do about it. Our expert, Nick, explores this below.
Under the current rules, most unused pension funds and death benefits fall outside the valuation of your estate for Inheritance Tax purposes. This has made pensions one of the most effective wealth transfer tools available to you. Since the pension freedoms introduced in 2015, you may well have been advised to draw down other assets first, such as savings and investments, and preserve your pension until last, precisely because it could pass to the next generation free of Inheritance Tax. In circumstances where people have died before age 75, their beneficiaries could often also receive those funds free of income tax.
It is important to note that pensions written under discretionary trust, where scheme trustees rather than the member decide who benefits, have generally offered the cleanest Inheritance Tax position. However, non-discretionary arrangements, where you nominate the beneficiary directly, or transfers made shortly before death while in ill health, could already expose funds to an Inheritance Tax charge under existing anti-avoidance principles. But as a general rule to date, your pension has been the safest place to leave wealth untouched.
With new reforms announced, HM Treasury has noted that the exemption has increasingly encouraged pensions to be used and marketed as a vehicle for passing on wealth, rather than for funding retirement, suggesting that this distorts both pension policy and the fairness of the Inheritance Tax system more broadly.
Most defined contribution pensions, including SIPPs, workplace pensions and personal pensions, currently sit outside your estate for Inheritance Tax purposes. Defined benefit and annuity income typically fall away on death and are not usually relevant to your Inheritance Tax position in the same way.
For deaths on or after 6 April 2027, most unused pension funds and pension death benefits, described in the legislation as “notional pension property”, will be added to the value of your estate. Where your estate, including the pension, exceeds the available nil-rate bands (£325,000, plus up to £175,000 residence nil-rate band where applicable), the excess will be subject to Inheritance Tax at the standard rate of 40%.
Some important features of the current regime survive the reform:
A significant administrative shift also accompanies the reform. Responsibility for reporting and paying any Inheritance Tax due on pension wealth moves from pension scheme administrators to your personal representatives (executors). Scheme administrators will have new duties to support that process, including through a new Pensions Direct Payment Scheme, and your personal representatives will be able to instruct administrators to withhold up to 50% of a benefit entitlement for up to fifteen months after the end of the month of death, to allow time for the Inheritance Tax position to be resolved. There remains an open question, not yet fully answered by HMRC, as to how double taxation will be addressed where a pension is both subject to Inheritance Tax on death and to income tax in the hands of a beneficiary who draws it after age 75.
The right approach will depend heavily on your individual circumstances, but several strategies are worth considering well ahead of April 2027.
Possibly not. Inheritance Tax is only payable on the value of your estate above the available nil-rate bands (£325,000, plus up to £175,000 residence nil-rate band where applicable, which may be transferrable to surviving spouses or partners). If your total estate, including your pension, is likely to remain below these thresholds, the change may have little or no practical effect on you.
In most cases, no. Defined benefit pensions do not usually have an “unused fund” in the way that defined contribution pensions do, so they generally remain outside the scope of the new rules.
There is no need to make rushed decisions. It is worth reviewing your beneficiary nominations, understanding roughly how the change would affect your estate, and considering whether your wider retirement and estate planning still makes sense in light of it, ideally with professional advice.
Yes. The spousal and civil partner exemption is unaffected by this reform.
The reform has been confirmed in the Finance Act 2026 and takes effect for deaths on or after 6 April 2027. Some operational detail, including how double taxation with income tax will be addressed, is still being finalised by HMRC.
This is one of the most significant changes to estate planning in recent years. Pensions have been treated, in effect, as a separate and protected pot for a generation of savers, and that assumption is now ending. If you have structured your retirement or estate planning around the current exemption, whether deliberately or simply by following common practice, you should expect your position to look different from April 2027 onwards.
Our Wills, Probate and Contested Estates team can help you understand how these changes affect your own circumstances, review your existing will, trusts and beneficiary nominations, and consider what planning steps may be worth taking ahead of April 2027.
General guidance from the Wills, Probate and Contested Estates team at Darwin Gray LLP. This article is for information only and is not legal advice. For advice on your own circumstances, please contact our team via our Contact Us form or call 02920 829 100.
To speak to one of our experts today, please contact us on 02920 829 100 or by using our Contact Us form for a free initial chat to see how we can help.
