Inheritance Tax on Pensions: What Changes in April 2027

For years, a pension was one of the most tax efficient things you could leave behind. It sat outside your estate, so it could pass to your children or grandchildren free of inheritance tax. From 6 April 2027 that changes. Most unused pension funds and pension death benefits will be counted as part of your estate, which means the money you have built up for retirement could now face inheritance tax at 40%. If your pension is a big part of what you plan to pass on, this is the moment to look again at your plans for passing on wealth.

What is changing with inheritance tax on pensions?

Until now, unused money in most defined contribution pensions sat outside your estate when you died. That made pensions a popular way to pass on wealth, and many people deliberately spent their other savings first so the pension could be left untouched.

For deaths on or after 6 April 2027, that protection goes. Unused pension funds, money left in drawdown and some lump sum death benefits will be added to the value of your estate, alongside your home, savings and investments. Anything above your allowances is then taxed at 40%.

A few things stay the same. Whatever you leave to a spouse or civil partner is still free of inheritance tax, so for many couples the real impact comes on the second death. Death in service benefits paid through a registered pension scheme are also left out. The allowances themselves are unchanged: the £325,000 nil rate band and the £175,000 residence nil rate band, both frozen until April 2031.

Do pensions form part of an estate in the UK?

From April 2027, for inheritance tax purposes, yes. Your pension is valued at the date of death and added to everything else you own.

That can have a knock on effect. Once an estate is worth more than £2 million, the residence nil rate band starts to shrink, by £1 for every £2 over the limit. With a family home in Surrey or London and a healthy pension, crossing that line is easier than it sounds, and losing the allowance can add up to £70,000 to the bill on top of the tax on the pension itself.

Is a SIPP or drawdown pension subject to inheritance tax?

In most cases, yes. The new rules cover personal pensions, workplace defined contribution schemes, self invested personal pensions (SIPPs) and any money you have moved into drawdown. It doesn’t matter whether you have started taking an income or not. What is left in the pot when you die is what counts.

Annuities work differently. One that simply stops when you die leaves nothing behind to tax. If yours has a guarantee period or value protection, any payments still due after your death may be included. Most defined benefit pensions pay an ongoing income to a surviving spouse, which isn’t affected, although some lump sum death benefits from these schemes do now fall into scope.

Pension beneficiary rules: what your family could pay

Inheritance tax is only half the picture, because income tax can apply too. If you die before 75, your beneficiaries can usually take what they inherit from your pension free of income tax. If you die at 75 or over, whatever they draw out is taxed as their own income, at their highest rate.

From April 2027, inheritance tax is worked out first, and income tax then applies to what your family takes from the pension afterwards. For larger pots, the two together can take a surprisingly big share.

How your beneficiaries take the money matters as well. Drawing an inherited pension as one large lump sum can push someone into the 45% band in a single tax year. Leaving it invested and taking it gradually through beneficiary drawdown can keep more of each withdrawal in a lower band, so it is worth making sure your pension scheme allows this before anything happens.

An example

Take someone aged 78, widowed, leaving everything to their two adult children. They own a home worth £600,000, have £200,000 in savings and investments, and £300,000 left in a SIPP. We have assumed they get the full £500,000 of allowances, with nothing transferred from a late spouse and no recent gifts, and that the children are higher rate taxpayers who draw the pension out over time.

The family ends up with roughly £94,000 less, purely because of the change in the rules. On the pension alone, the children keep a little under half of the £300,000. This is a simplified illustration, and every situation is different. You can run your own figures, both under today’s rules and after April 2027, with our inheritance tax calculator.

How to reduce inheritance tax on your pension

There is no single answer, but there are several sensible steps worth looking at with an adviser.

Check who your pension goes to. Your pension doesn’t pass under your will. It is paid out according to the expression of wish form you have given the scheme, and many people haven’t looked at theirs in years. Money left to a spouse, civil partner or charity is still free of inheritance tax.

Rethink the order you spend your money. The old approach of living off everything else and leaving the pension alone may no longer make sense. Drawing more from your pension during retirement can reduce what is left in your estate, although those withdrawals are taxed as income, so it needs balancing carefully against your retirement income plans.

Make use of gifting. Regular gifts made from your income, including pension income, can fall outside your estate straight away, as long as they don’t affect your standard of living. Larger gifts generally fall outside your estate once you have survived them by seven years. Our guide to passing on wealth looks at gifting in more detail, including how to give without leaving yourself short.

Plan for the bill rather than the tax. Some families prefer to keep the pension intact and cover the expected inheritance tax with a life insurance policy written in trust, so the payout sits outside the estate and is available when it is needed.

Look at the whole picture. The right approach depends on your age, your health, your other assets and what you want your family to receive. Our case study on protecting a legacy without letting go of control shows what this planning looks like in practice, and a review can show how the April 2027 change affects your own plans.

What about the Autumn Budget?

The Autumn Budget on 28 October 2026 confirmed that the change goes ahead as planned from 6 April 2027, so everything above still applies. Our summary of the Autumn Budget 2025 covers the other changes from that Budget. With the rules now settled, it is sensible to start planning rather than wait.

Who it’s for

Anyone with a pension they expect to pass on, particularly if it makes up a large part of their wealth or they are already over 75. It is also worth reading if you have put off reviewing your expression of wish form, or if you want to understand how the April 2027 change fits into your wider family wealth planning.