If you are dealing with a pension after a death, or planning your own affairs, the first thing to know is this: for deaths before 6 April 2027, most unused pension funds and pension death benefits are outside the estate for inheritance tax, so no IHT applies to them. From 6 April 2027, that changes – most unused pension funds and death benefits will be brought within the value of the estate for inheritance tax purposes.
This is one of the biggest changes to inheritance tax in years, and it affects a lot of people, so this guide sets out both positions clearly: how pensions are treated now, what is changing from April 2027, who is and is not affected, and what it means alongside the nil-rate band. Where a decision depends on your own circumstances, we point you to regulated financial advice rather than guessing – pensions and tax are complex, and getting it wrong is costly.
Are pensions subject to inheritance tax right now?
For deaths before 6 April 2027, most unused pension funds and pension death benefits are not subject to inheritance tax. A defined contribution pension – a personal pension, a workplace pension pot, or a drawdown fund – is usually held under a discretionary trust. The scheme administrator decides who receives the death benefit, guided by the member’s expression of wishes nomination. Because the money is paid at the administrator’s discretion, it does not legally form part of the deceased’s estate, so it falls outside inheritance tax (gov.uk – Tax on a private pension you inherit).
This is why pensions have often been used as a way to pass wealth to the next generation. A pot left undrawn could pass to beneficiaries free of inheritance tax, which is exactly the behaviour the April 2027 reform is designed to change.
There are already some nuances under the current rules. Where a pension is paid directly to the estate because there is no valid nomination, it can fall into the estate and become subject to IHT. Certain older or guaranteed arrangements can also be treated differently. Income already being drawn from a pension is spent as you receive it, so it does not sit as an unused fund to be taxed.
What is changing from 6 April 2027
From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased person’s estate for inheritance tax. The value of the pot is added to the rest of the estate, and inheritance tax at 40% applies to the total above the available nil-rate bands (gov.uk – Technical note: Inheritance Tax on pensions).
The change was announced at Autumn Budget 2024 and legislated in the Finance Act 2026, which received Royal Assent on 18 March 2026. It amended the Inheritance Tax Act 1984 and related pensions legislation to bring what the legislation calls “notional pension property” into the estate (gov.uk – Technical note: Inheritance Tax on pensions).
The government’s stated purpose is to remove what it describes as distortions “which have led to pension schemes being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for funding retirement”, and to remove inconsistencies in how different pension types are taxed on death (gov.uk – Inheritance Tax on unused pension funds and death benefits).
The date is a hard line. If the pension scheme member dies before 6 April 2027, the current rules apply, even if the pension benefits are paid to beneficiaries after that date. It is the date of death that matters, not the date of payment.
Current position and the new position at a glance
| Deaths before 6 April 2027 | Deaths on or after 6 April 2027 | |
|---|---|---|
| Unused defined contribution pension pot | Generally outside the estate; no IHT | Counts towards the estate; may attract IHT at 40% |
| Most lump sum death benefits | Generally outside the estate; no IHT | Counts towards the estate; may attract IHT |
| Passing to a spouse or civil partner | No IHT | Still exempt – no IHT |
| Death in service benefit (registered scheme) | Outside the estate | Still outside the estate – excluded from the change |
| Who reports and pays any IHT | Scheme administrator handles payment to beneficiaries | Personal representatives report and pay |
How pensions are currently excluded from the estate
Under the rules that apply until 5 April 2027, a defined contribution pension pot is not counted as part of the deceased’s estate because of how the arrangement is structured in law. The pension provider or trustees hold the fund, and on death they exercise discretion over who receives it. That discretionary element is what keeps the pot outside the deceased’s estate for inheritance tax.
The practical route by which this works is the expression of wishes (or nomination) form. This tells the scheme administrator who the member would like to benefit. It is not usually legally binding – the administrator retains discretion – but in practice providers almost always follow a clear, up-to-date nomination where there is no competing claim. Because the benefit is paid this way rather than under the will, it bypasses probate and, for deaths before April 2027, bypasses inheritance tax.
Different pension types behave differently, and our per-provider guides cover the specifics – for example the NHS pension, Aviva pension, and Royal London pension death-benefit processes.
What “unused pension funds and death benefits” means
The change applies to what the legislation calls notional pension property: broadly, the unused funds and death benefits held for a member in registered pension schemes, certain qualifying non-UK pension schemes, and section 615(3) schemes (gov.uk – Technical note: Inheritance Tax on pensions).
In everyday terms, the assets most likely to be caught are:
- Unused defined contribution pension pots – the money left in a personal pension, workplace pension, or drawdown fund that the member had not spent.
- Most lump sum death benefits paid from a pension because the member died with funds remaining.
The change applies to both discretionary and non-discretionary schemes, with limited exceptions (gov.uk – Inheritance Tax on unused pension funds and death benefits).
What stays outside the change
Several types of benefit are specifically excluded and remain outside the estate for inheritance tax even after April 2027 (gov.uk – Technical note: Inheritance Tax on pensions):
- Death in service benefits paid from a registered pension scheme.
- Dependants’ scheme pensions from a defined benefit arrangement or a collective money purchase arrangement.
- Certain joint life annuities – dependants’ or nominees’ annuities bought alongside a lifetime annuity.
- Charity lump sum death benefits in defined circumstances.
Income being paid from a pension is not affected, because it is spent rather than left as an unused fund.
Who is affected and who is not
The reform does not mean every pension will now be taxed. Two large groups are largely protected.
Spouses and civil partners. Transfers to a surviving spouse or civil partner remain exempt from inheritance tax, with no upper limit, and this continues to apply to pension funds and death benefits passing to a spouse or civil partner from 6 April 2027 (gov.uk – Inheritance Tax on unused pension funds and death benefits). Directing a pension to a surviving spouse or civil partner through the expression of wishes nomination remains a tax-efficient choice where it reflects the member’s wishes. Bequests to registered charities also stay exempt.
Estates below the nil-rate band. A pension only produces an inheritance tax bill if the whole estate, once the pension is added in, exceeds the available allowances. Many estates will still fall below the threshold and pay nothing.
To put a scale on it, the government estimates that of around 213,000 estates with inheritable pension wealth in 2027 to 2028, about 10,500 estates will have an inheritance tax liability where previously they would not, and around 38,500 estates will pay more than they otherwise would, with an average additional liability of roughly £34,000 (gov.uk – Inheritance Tax on unused pension funds and death benefits).
Who reports and pays the tax
From 6 April 2027, the personal representatives of the estate become responsible for reporting and paying any inheritance tax due on unused pension funds (gov.uk – Technical note: Inheritance Tax on pensions). This is a real shift in administration. Before the change, pension death benefits mostly sat outside the estate and the scheme administrator dealt with payment to beneficiaries. After it, the executor or administrator must obtain the pension values, work out the split between exempt and non-exempt beneficiaries, and account to HMRC.
Once a pension death benefit has been paid out, the beneficiary who received it becomes jointly and severally liable with the personal representatives for the inheritance tax attributable to that benefit. HMRC has said it will publish supporting templates and interactive tools to help personal representatives before the change takes effect.
How this interacts with the nil-rate band
A pension does not come with its own separate inheritance tax allowance. From April 2027, its value is simply added to the rest of the estate, and the combined total is measured against the allowances that already exist:
- the standard nil-rate band of £325,000 per person, frozen until at least 5 April 2031;
- any transferable nil-rate band inherited from a late spouse or civil partner, which can take a couple’s combined threshold to £650,000;
- the residence nil-rate band of up to £175,000, where a home passes to direct descendants, subject to the taper for estates above £2 million.
Our guides to the nil-rate band and the residence nil-rate band explain these in full. Inheritance tax at 40% applies only to the value above the available allowances (36% where at least 10% of the net estate passes to charity).
The important practical point is that adding a pension pot to the estate can push a total that was previously under the threshold above it. An estate of £300,000 in property and savings pays no IHT today. Add an unused £150,000 pension pot from April 2027, and £125,000 of the combined £450,000 estate sits above a single £325,000 nil-rate band, producing a potential £50,000 tax charge – unless allowances such as the residence nil-rate band or a transferable nil-rate band bring the threshold higher.
What pension holders and beneficiaries can do to prepare
This section is general information, not financial advice. Pensions and inheritance tax interact with income tax, your age and health, and your own income needs, so decisions about drawing or restructuring a pension should be taken with a regulated financial adviser.
With that firmly in mind, some general pointers:
- Check your expression of wishes nomination is up to date. Directing a pension to a surviving spouse or civil partner keeps the spousal exemption in play. An out-of-date nomination can send money to the wrong person and lose an exemption.
- Understand your whole estate, not just the pension. Whether the pension produces a tax bill depends on the total estate against the available nil-rate bands, including any residence nil-rate band and transferable band.
- Be cautious about withdrawing large sums in a rush. Money taken out of a pension can trigger income tax at your marginal rate, and giving it away then brings the seven-year gift rules into play. What looks like an IHT saving can create a larger income tax bill.
- Keep good records. Personal representatives will need pension values and beneficiary details from April 2027, so clear paperwork helps whoever administers your estate.
Because the detailed information-sharing regulations underpinning the change were still being finalised through 2026, the mechanics of how schemes and personal representatives exchange information may be refined before April 2027. Check the latest position on gov.uk and take advice on your own circumstances.
Common questions about inheritance tax on pensions
Are pensions subject to inheritance tax?
For deaths before 6 April 2027, most unused pension funds and death benefits are outside the estate for inheritance tax. From 6 April 2027, under the Finance Act 2026, most unused pension funds and death benefits are brought within the estate for IHT. Pension income already in payment is not affected.
What is changing in April 2027?
From 6 April 2027, unused pension funds and most death benefits count towards the estate and may be taxed at 40% above the nil-rate band. The change applies to deaths on or after that date; if the holder dies before it, the current rules apply even if benefits are paid later.
Does the spouse exemption still apply?
Yes. Pension funds and death benefits passing to a surviving spouse or civil partner remain exempt from inheritance tax, with no upper limit, after April 2027. Bequests to registered charities are also still exempt.
Are death in service benefits caught?
No. Death in service benefits from a registered pension scheme are excluded and stay outside the estate. Dependants’ scheme pensions and certain other survivor benefits are also out of scope.
Who pays the inheritance tax on a pension after April 2027?
The estate’s personal representatives report and pay it, a change from the current position where scheme administrators handle payment. A beneficiary who has received a pension death benefit becomes jointly liable for the IHT attributable to it.
Summary
For deaths before 6 April 2027, most unused pension funds and pension death benefits sit outside the estate and pay no inheritance tax. From 6 April 2027, under the Finance Act 2026, most unused pension funds and death benefits are brought within the estate, and may be taxed at 40% on the value above the available nil-rate bands. Transfers to a spouse or civil partner stay exempt, death in service benefits are excluded, and the estate’s personal representatives take on the job of reporting and paying any tax due.
If you are administering an estate now, the current rules almost certainly apply. If you are planning ahead, the change is worth understanding alongside the wider inheritance tax rules, the nil-rate band, and the seven-year gift rules – and worth a conversation with a financial adviser about your own position before April 2027.
Verified against gov.uk and HMRC guidance, last verified 17 July 2026. The April 2027 change was announced at Autumn Budget 2024 and legislated in the Finance Act 2026 (Royal Assent 18 March 2026), taking effect for deaths on or after 6 April 2027. Some of the detailed information-sharing regulations were still being finalised through 2026 – check gov.uk for the latest position. This guide covers the United Kingdom and is for information only; it does not constitute legal, tax, or financial advice. For pension and estate-planning decisions, speak to a regulated financial adviser.