Pension Pots Face Inheritance Tax from April 2027: What to Do Now

From 6 April 2027, most unused defined contribution pension funds will be included in the value of your estate for inheritance tax purposes. That means a pension pot that sits untouched when you die could be taxed at 40% on whatever portion of it pushes your total estate above the nil-rate band threshold. For decades, pensions sat outside the inheritance tax regime entirely. That exemption is ending, and it affects anyone who has built up a significant defined contribution pot and was planning to pass it on to children or grandchildren.

What the current rules are and why they are changing

Right now, most UK defined contribution pensions are held under discretionary trust structures. Because you do not legally own the pot at the point of death, it falls outside your estate for inheritance tax. Your beneficiaries receive the funds subject only to income tax if you die after age 75, or tax-free if you die before 75 up to the lump sum and death benefit allowance of £1,073,100.

This has made pensions one of the most effective vehicles for passing wealth to the next generation, which is exactly why the government is changing the rules. The Chancellor confirmed the change at the October 2024 Autumn Budget. HMRC published draft legislation on 21 July 2025 and confirmed the approach remains on track for April 2027. The stated aim is to stop pensions being used as an inheritance tax planning tool rather than a retirement income product.

HMRC estimates the change will bring around 49,000 additional estates within scope of inheritance tax in 2027/28 alone.

What changes from 6 April 2027

From that date, unused defined contribution pension funds will be added to the value of your estate when calculating inheritance tax. If your combined estate including the pension pot exceeds your available nil-rate bands, the excess is taxed at 40%.

The standard nil-rate band is £325,000. If you own a home and pass it to direct descendants, the residence nil-rate band adds up to £175,000 more, bringing the total to £500,000. Married couples and civil partners can combine unused allowances, so a couple can pass up to £1 million free of inheritance tax if they meet the residence conditions. But a pension pot on top of property, savings, and investments will push many more estates over those thresholds than before.

There are some important exemptions:

Transfers to a spouse or civil partner remain exempt. On a first death, funds passed to a surviving spouse do not trigger inheritance tax on the pension. The issue is what happens on the second death, when the full combined estate including both partners’ pensions is assessed.

Defined benefit pensions are largely unaffected. If your pension pays a guaranteed income rather than building up a pot, the 2027 changes generally do not apply. This affects defined contribution pensions, SIPPs, and most modern workplace pensions.

Death in service benefits are exempt. Lump sum payments from employer life cover schemes will remain outside the estate for inheritance tax purposes.

The new rules only apply where the member dies on or after 6 April 2027. Existing funds already in drawdown are affected; it is not just uncrystallised pots.

The double tax problem for those dying after 75

This is the detail that has alarmed advisers most. If you die after age 75 with money still in your pension, your beneficiaries currently pay income tax when they draw from it. Under the 2027 rules, inheritance tax at 40% is applied first, and then the beneficiary pays income tax on what remains.

The government has said it will provide relief where both taxes apply to the same funds, but the mechanics of this are still being finalised. Until the final legislation is published, advisers are working from draft rules.

Who is actually affected

The change is most relevant if you:

• Have a defined contribution pension pot that, when added to your property and other assets, takes your estate above £325,000 (or £500,000 with the residence nil-rate band, or £1 million for a couple)
• Were planning to leave your pension largely untouched and pass it to children or grandchildren
• Are in your 50s or 60s and have time to adjust your drawdown strategy before 2027

If your total estate including your pension is comfortably below the nil-rate band, the change may not affect you materially. If your pension is your largest single asset and you have a family home on top, run the numbers carefully.

What you can do before April 2027

Review your expression of wish form. This is the nomination form that tells your pension provider who you want to receive the funds. It does not legally bind them, but it guides their discretion. With pensions now potentially subject to inheritance tax, having a clear, current nomination matters more than ever. A spouse or civil partner remains the most tax-efficient beneficiary on first death.

Think about drawing down more, not less. The old planning logic was to spend taxable assets first and preserve the pension as long as possible because it sat outside your estate. That logic is now weaker. Drawing from your pension while you are alive, paying income tax on it, and then gifting the cash to family may result in less total tax than leaving the pot to be hit by inheritance tax on top of income tax. This is not straightforward, because taking large pension withdrawals pushes you into higher income tax bands. It requires actual modelling for your specific situation.

Seven-year gifts. Cash withdrawn from your pension and given away as a gift falls outside your estate if you survive seven years from the date of the gift. Gifts above £3,000 a year start a seven-year clock; if you die within seven years, they are added back to the estate on a tapered basis. This only makes sense if you genuinely do not need the money for retirement income.

Check what your estate looks like in total. Most people have not recently added up property, savings, ISAs, investments, and pension in one number. If you have not done this, do it now. The pension change could move you from comfortably below the inheritance tax threshold to clearly above it.

Defined benefit members: check your specific scheme rules. Most DB pensions are outside scope, but some schemes have lump sum death benefits or added features that may be caught by the new rules. Your scheme administrator should be writing to members about this.

How the tax is collected from 2027

The administration is also changing. Under the original proposals, pension providers would have calculated and paid inheritance tax directly. The final approach puts that responsibility on the personal representatives of the estate, meaning whoever is named executor in your will.

They will need to contact every pension scheme, obtain a valuation as of the date of death, and report the pension funds alongside the rest of the estate on the IHT400 form. HMRC intends to provide an online calculator to help. Where inheritance tax is due, executors can direct the pension scheme to withhold up to 50% of the funds and pay the tax directly to HMRC before distributing the rest to beneficiaries.

This is a significant increase in complexity for estates that include pensions. If you are naming someone as executor who is not a professional, it is worth having a conversation with them about what the role will involve.

The bottom line

Pensions have been one of the cleanest inheritance tax shelters available to UK savers for the past decade. From 6 April 2027, that changes. The change does not mean you should empty your pension tomorrow; that could trigger a large income tax bill and harm your retirement security. But it does mean reviewing your estate plan, updating your nominations, and thinking carefully about whether the old “spend other assets first, preserve the pension” approach still makes sense for your situation.

The 2027 deadline is less than a year away. For estates that will be materially affected, the time to take stock is now.