Pensions and inheritance tax from April 2027
For years the usual advice was to spend other savings first and leave the pension untouched, because it could pass outside the estate. From April 2027 that changes for most people, and many retirement and estate plans need to be revisited.
By Vince De Stefano, Head of Financial Services
Updated 26 October 2026
4 min read
Key takeaways
- For deaths on or after 6 April 2027, most unused defined contribution pension funds and pension death benefits count towards the estate for inheritance tax.
- Pensions left to a spouse or civil partner remain exempt, and death-in-service benefits are excluded.
- Where the pension holder dies at 75 or over, beneficiaries can pay income tax on withdrawals on top of any inheritance tax.
- The order in which you draw on pensions, ISAs and other savings may need to change.
What is changing
Until April 2027, most defined contribution pensions, such as personal pensions, SIPPs and workplace money-purchase schemes, sit outside the estate because the scheme administrator has discretion over who receives the funds. For deaths on or after 6 April 2027, the value of unused funds and most lump sum death benefits is added to the estate and taxed alongside everything else at 40% above the available nil-rate bands.
The spouse and civil partner exemption still applies, so a pension passing to a surviving spouse who is a long-term UK resident is not taxed on the first death. Several benefits are outside the new rules, including death-in-service lump sums from your current employment, dependants' scheme pensions and joint-life annuities.
Who reports and pays the tax
The personal representatives of the estate are responsible for reporting the pension and paying any inheritance tax due on it. Once benefits have been paid to a beneficiary, the beneficiary is also liable for the tax on them. Personal representatives can tell the scheme to pay the tax directly, and can ask it to hold back up to 50% of the benefits for up to 15 months while the tax is worked out. Executors will need valuations from every pension scheme, which adds time to estate administration.
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Income tax as well as inheritance tax
Where the pension holder dies before 75, beneficiaries can usually draw the inherited fund free of income tax. Where they die at 75 or over, withdrawals are taxed as the beneficiary's income. After April 2027 a fund inherited from someone over 75 may therefore be reduced by inheritance tax and the remainder taxed again as income when it is drawn. For a higher-rate taxpayer beneficiary, the combined rate on part of the fund can reach 64%.
What to review now
- Expression of wish forms. Check who you have nominated with each scheme, and whether that still fits your will.
- Order of withdrawals. Drawing more from the pension and less from ISAs or other savings may now leave more to your family overall. This depends on your tax band in retirement and your beneficiaries' bands.
- Gifting from surplus income. Regular gifts from pension income that leave your standard of living unchanged are exempt from inheritance tax immediately. See gifting to children.
- Tax-free cash. Taking the tax-free lump sum and gifting it starts the seven-year clock, but it cannot be put back, so it needs careful modelling.
- Life cover in trust. A policy written in trust can pay out outside the estate to meet the tax.
- Consolidation. Fewer schemes mean fewer valuations for your executors. See combining old pensions.
The right answer depends on your income needs, your health, the size of the estate and your beneficiaries' tax positions. We model withdrawals and gifts in a cash-flow plan, with the inheritance tax and income tax shown together.
Frequently asked questions
Will my pension be subject to inheritance tax?
For deaths on or after 6 April 2027, most unused defined contribution pension funds and death benefits are included in the estate. Pensions left to a spouse or civil partner who is a long-term UK resident remain exempt.
Are death-in-service benefits affected?
Death-in-service lump sums from your current employment are outside the new rules. Benefits from earlier employers' schemes may not be.
Who pays the inheritance tax on a pension?
The personal representatives are responsible for reporting and paying it, and beneficiaries who have received benefits are also liable. The scheme can be told to pay the tax from the fund.
Should I start drawing my pension sooner?
Possibly. It depends on your income tax band, the size of your estate and your beneficiaries' tax positions. Model the options before changing anything.
Sources & further reading
The value of investments and the income from them can fall as well as rise, and you may get back less than you invest. Tax treatment depends on your circumstances and may change.
This article is general information, not advice. Tax, financial and legal rules change and their effect depends on your circumstances. Check the current position and take professional advice before acting. Last reviewed 26 October 2026. Totus One Limited (company no. 16855798).
An independent financial planner advising individuals and families on pensions, investments, protection and inheritance.
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