Pensions and Inheritance Tax from April 2027

What changes in April 2027

For deaths on or after 6 April 2027, the value of unused pension funds and most lump sum death benefits is added to the rest of the estate. That covers defined contribution pots, such as workplace and personal pensions and SIPPs, whether or not you've started drawing from them.

Some things stay outside:

• death-in-service lump sums paid by an employer's scheme
• dependants' scheme pensions, such as a widow's pension from a final salary scheme
• joint-life annuities that carry on paying a survivor

The people dealing with your estate (your personal representatives) work out the tax and pay it. They can ask the pension scheme to pay the pension's share straight to HMRC, and whoever inherits the pension is also liable for the tax on it.

How the tax is shared

The tax is worked out on the whole estate, with the pension included, and then shared across everything chargeable in proportion to its value. If the pension is 30% of what's chargeable, it bears 30% of the tax.

That has a side effect that's easy to miss: adding the pension pushes up the tax on the rest of the estate too, because the allowances are now spread over more.

Worked example

Joan is widowed and dies in May 2027, aged 78. She leaves her home (£450,000) and savings (£250,000) to her two children, who each earn £45,000. She also has £300,000 left in a pension, and her husband's allowances were used up when he died, so she has the standard £325,000 and £175,000.

The children keep £36,000 less from the pension, and pay £60,000 more Inheritance Tax on the home and savings. The new rules cost Joan's family £96,000.

The Income Tax falls a little, because it's only charged on what's left after Inheritance Tax. Each child takes £12,000 a year on top of their pay, and more than half of it is taxed at 40%.

See what your family would keep from your pension →

Dying before or after 75

Before 75, pension death benefits are usually free of Income Tax for whoever inherits them. Lump sums are tax-free up to the Lump Sum and Death Benefit Allowance of £1,073,100, and beneficiary drawdown is tax-free. There used to be a catch: either had to be paid or set up within two years of the death. The 28 October 2026 Budget removed that two-year rule for payments made on or after that day (it becomes law in the next Finance Act). From April 2027 Inheritance Tax can still apply.

At 75 or over, whatever the beneficiary takes out is added to their income and taxed at their rate. For a beneficiary paying 45%, Inheritance Tax at 40% and Income Tax at 45% on the remaining 60% take about 67% of the pension. Taking a large sum in one year can push someone into a higher band, or over £100,000 where their Personal Allowance starts to go, so spreading withdrawals usually helps.

The £2 million taper

The £175,000 residence nil-rate band for a home left to children or grandchildren is reduced by £1 for every £2 the estate is worth over £2 million. From April 2027 the pension counts towards that £2 million, so a large pension can take away the home allowance as well. Both bands are frozen until April 2031.

Things people are looking at

Who gets the pension. A pension left to a husband, wife or civil partner is free of Inheritance Tax. Check that your scheme's nomination form says who you'd want it to go to.

Which money to spend first. The old rule of thumb was to spend everything else and keep the pension for last. Now the pension no longer escapes Inheritance Tax, that's worth a second look, especially after 75.

Gifts. Regular gifts from surplus income are free of Inheritance Tax straight away, as are gifts within the £3,000 annual exemption. Most other gifts fall out of the estate after seven years, but not ones you keep a benefit from, such as a home you still live in.

This is general information, not advice. A regulated financial adviser can look at your own position.