From 6 April 2027, unused pension funds and most pension death benefits count as part of your estate for inheritance tax. This is law — Finance Act 2026, not a proposal — and it inverts twenty years of retirement planning: the pension, long the one pot that passed to the next generation IHT-free, becomes for many families the pot that pushes the estate over the threshold. For deaths after age 75 the arithmetic is brutal: IHT at 40% followed by income tax on what beneficiaries draw, producing combined effective rates of up to 67% on the top slice.
Here is exactly what changes, who it hits, and what the sensible responses look like — with the window to make them running to 6 April 2027.
What comes into the estate — and what stays out
For deaths on or after 6 April 2027, the estate includes most unused pension funds and death benefits: defined-contribution pots above all, plus lump sums from defined-benefit schemes, and it applies even where scheme trustees have discretion over who gets paid — the discretion that used to keep these funds outside IHT no longer does.
The exclusions matter and are specific: death-in-service benefits (payable only because you were still employed), dependants' scheme pensions, charity lump sum death benefits, and joint-life annuity continuations stay outside. And the two big exemptions work exactly as elsewhere in IHT: pensions passing to a spouse or civil partner are exempt, as are amounts to charity. The change bites hardest on the second death, and on anything left to children.
The double tax problem after 75
Income tax on inherited pensions continues unchanged: die before 75 and beneficiaries can generally draw the funds income-tax-free — lump sums within the £1,073,100 lump sum and death benefit allowance, and beneficiary drawdown or annuities without that cap, provided designation happens within two years; die at 75 or over and they pay income tax at their marginal rates on everything drawn. From April 2027 that stacks on top of IHT. A £500,000 pot left to a higher-rate child by a parent dying at 80, in an estate already over the thresholds: 40% IHT takes it to £300,000, then 40% income tax as it is drawn — roughly £180,000 in hand from £500,000 saved. The widely-quoted combined rates of 52%, 64% and 67% for basic, higher and additional-rate beneficiaries are correct on rUK rates (Scottish rates push the top combination higher still). One mercy in the final design: the slice a scheme pays directly to HMRC for the IHT is not also taxed as the beneficiary's income.
Who actually handles it: your executors
After consultation, the government dropped the idea of making pension schemes liable and settled it on personal representatives — your executors — with beneficiaries jointly liable once benefits vest. The machinery, worth knowing because your executors will live it: schemes must provide valuations within 28 days of request; PRs can direct schemes to withhold up to 50% of taxable death benefits for up to 15 months while the IHT position settles; and beneficiaries can instruct schemes to pay IHT straight to HMRC rather than funding it personally.
The practical upshot is that estates with pensions become slower and more complicated to administer — multiple schemes, valuations, notices and elections layered onto the ordinary six-month IHT payment deadline. Executors of pension-heavy estates will need professional support more often than before, and choosing executors who can cope just became part of pension planning. Our probate team is already building 2027 deaths into its processes.
What planning actually responds — and what doesn't
There are no anti-forestalling rules: the change simply applies to deaths from 6 April 2027, which means action taken before and after remains effective under normal rules. (All of this runs to a fixed date — deaths on or after 6 April 2027 — not a countdown.) The genuine levers:
- Reorder the drawdown. "Spend everything else first, preserve the pension" was correct advice for twenty years and is now frequently backwards. For estates over the thresholds, drawing pension income — taxed at your marginal rate, often lower than your children's — and gifting or spending it can beat leaving the pot to face 64% combined rates. This is a per-family calculation, not a slogan;
- Gift from income, systematically. Regular gifts out of surplus income are IHT-exempt immediately and without limit — and pension income is income. A documented pattern of giving from drawdown is the single most efficient response for many retirees; our IHT rules guide covers the exemption's conditions;
- Reconsider annuities. An annuity converts a taxable pot into a stream that dies with you (or your spouse, on a joint-life basis) — the IHT problem literally annuitised away, at the price of flexibility and legacy. The 2027 change materially improves the case for annuitising part of large pots;
- Insure the liability. Whole-of-life cover written in trust funds the IHT bill outside the estate — often the cleanest answer where the family wants to keep the assets;
- Use both spouse exemptions properly. Pension death benefit nominations need reviewing alongside wills — an expression of wish drafted in 2015 may now route funds in the least efficient direction possible.
What does not respond: doing nothing because "the rules might change again", and panic-withdrawing whole pots (crystallising immediate income tax at 40%+ to avoid a contingent future 40% is usually worse arithmetic, not better).
Run the numbers this year
Every retired couple with meaningful pension savings should re-run their estate calculation with pensions included: assets, thresholds (£325,000 plus £175,000 residence band each, frozen to 2031), then the pension pots layered on. Many estates that were comfortably exempt are not, once a £600,000 SIPP joins the count — and the responses above all work better started in 2026 than discovered by executors in 2028.
Our inheritance tax planning team runs exactly this modelling, alongside private client tax for the drawdown-and-gifting mechanics. The time between now and 6 April 2027 is enough to plan well; it is not enough to defer the conversation again.