Pension Inheritance Tax 2027: It's Now Law — What You Need to Know

Pensions have long been the most tax-efficient way to pass wealth to the next generation. That era ends on 6 April 2027.

The Finance Act 2026 received Royal Assent on 18 March 2026, confirming what the industry feared since the 2024 Autumn Budget: unused pension funds will be included in your taxable estate for inheritance tax (IHT) purposes. No more sheltering large pension pots from the 40% IHT charge.

Here's what's changed, who's affected, and what you can realistically do about it.

What's Actually Changing?

Under the current rules (until 5 April 2027), most pension pots sit outside your estate for IHT. You could die with £1 million in a SIPP and your beneficiaries would receive it without a penny of inheritance tax — the pension scheme trustee distributes the funds based on your nomination, bypassing your estate entirely.

From 6 April 2027, that changes fundamentally:

• Most unused DC pension funds — SIPPs, personal pensions, workplace pots, uncrystallised funds — will be included in the value of your estate for IHT
• This applies regardless of whether you've started taking income from the pension
• Pension death benefits paid out on death will also count towards the estate value
• The standard IHT rate of 40% applies above available nil-rate bands

This isn't a proposal or a consultation. It's law.

Who's Affected?

The people hit hardest are those who deliberately kept money inside their pensions as an estate planning strategy — often drawing down ISAs and other savings first while leaving pension pots to grow and pass on tax-efficiently.

You're most likely affected if:

• Your total estate (now including pensions) exceeds £325,000 — the nil-rate band
• You're single — couples can effectively pass on up to £1 million IHT-free using the residence nil-rate band and transferable allowances, but adding a large pension pot could push the total over
• You've been deliberately preserving pension wealth rather than spending it in retirement
• You have multiple pension pots across different providers

Example: James is 72, widowed, with a house worth £400,000, savings of £100,000, and a SIPP worth £350,000. Under current rules, his pension sits outside the estate, so his taxable estate is £500,000 — covered by the nil-rate band (£325,000) plus residence nil-rate band (£175,000). No IHT.

From April 2027, his estate becomes £850,000. After the combined nil-rate bands of £500,000, there's £350,000 subject to IHT at 40% = £140,000 in tax that wouldn't exist under today's rules.

The Double Taxation Problem

Here's where it gets particularly painful. The age 75 dividing line for income tax on inherited pensions still applies:

• Death before 75: Beneficiaries receive the pension tax-free from income tax (but now face IHT on the value in the estate)
• Death at 75 or older: Beneficiaries pay income tax at their marginal rate on withdrawals and the estate pays IHT on the pension value

For deaths after 75, this creates a potential double tax charge. The government has indicated a tax credit mechanism to prevent the full impact of paying both 40% IHT and up to 45% income tax on the same money, but the details are still being finalised. Even with the credit, the combined effective tax rate on inherited pensions for deaths after 75 could exceed 60%.

Example: Maria dies at 78 with £200,000 left in her pension. Her estate pays IHT at 40% = £80,000. Her son inherits the remaining £120,000 in drawdown. As a higher-rate taxpayer, he pays 40% income tax on withdrawals = £48,000. Total tax: £128,000 on £200,000 — an effective rate of 64%. Even with a partial tax credit, the combined hit is severe.

What's Exempt?

Not everything is caught:

• Spouse and civil partner transfers remain fully exempt from IHT — as with all other assets
• Ongoing DB scheme pensions paid to a surviving spouse or dependant (no capital value to include)
• Death-in-service lump sum benefits from registered pension schemes — exempt for both active and non-active members
• Pensions already fully drawn — if there's nothing left in the pot, there's nothing to tax

The spouse exemption is particularly important. If you leave everything to your spouse, the IHT charge is deferred until the second death — same as it works for your house and other assets.

What Stays the Same?

Some things haven't changed:

• The income tax rules on inherited pensions are unchanged — tax-free if death before 75, taxable at the beneficiary's marginal rate if death at 75+
• Pension tax relief on contributions still works the same way
• Tax-free growth inside pension wrappers continues
• The 25% tax-free lump sum (up to £268,275) is unaffected
• Your ability to nominate beneficiaries through an expression of wish form hasn't changed

Pensions remain excellent savings vehicles for retirement. They're just no longer the estate planning silver bullet they were.

Who Pays the IHT?

This is one of the trickiest practical aspects. Executors (personal representatives) are responsible for:

1. Working out the IHT due on the pension element of the estate
2. Instructing pension providers to withhold funds
3. Paying the IHT to HMRC before releasing pension funds to beneficiaries

This adds significant administrative burden — and delay. Under amendments made during the bill's passage, personal representatives can withhold up to 50% of pension benefits for up to 15 months to provide flexibility for IHT calculations and payment.

For families already dealing with bereavement, this means longer waits to access inherited pension funds compared to today's relatively straightforward process.

What Can You Do Now?

You have just over a year before April 2027. Here are the realistic options:

1. Review Your Total Estate Value

Add your pension pots to your other assets (property, savings, investments). If the total exceeds your available nil-rate bands, you'll have an IHT exposure from April 2027 that didn't exist before.

Use our pension calculator to get a clear picture of your projected pension value at different ages.

2. Reconsider Your Drawdown Order

The old wisdom of "spend other assets first, preserve the pension" is now questionable. If your pension will face IHT anyway, it may make sense to draw from it earlier and use the funds to make gifts, invest in ISAs, or spend on your retirement.

But don't rush. Pension income still gets tax relief on the way in and tax-free growth — it's still tax-efficient for funding your actual retirement.

3. Use Your Spouse Exemption

If you're married or in a civil partnership, ensure your pension nomination directs funds to your spouse first. This defers the IHT charge entirely. Your spouse can then spend, gift, or redistribute the funds during their lifetime.

4. Consider Lifetime Gifts

Assets given away more than seven years before death fall outside the estate entirely. While you can't gift a pension directly, you could draw from your pension and gift the after-tax proceeds to children or grandchildren. The seven-year clock starts on each gift.

5. Get Professional Advice

This change is significant enough that anyone with a pension pot above £100,000 and a total estate approaching the nil-rate band should speak to a financial adviser. The interaction between IHT, income tax, pension drawdown strategy, and lifetime gifting is complex — and getting it wrong could cost your family tens of thousands.

What This Means for Pension Planning Going Forward

The pension IHT change doesn't make pensions bad. They still offer:

• Up to 45% tax relief on contributions
• Tax-free investment growth
• 25% tax-free lump sum on withdrawal
• Flexible drawdown from age 55 (57 from 2028)
• Employer contributions in workplace schemes

What's changed is pensions' role in estate planning. They're no longer the tax-free inheritance vehicle they've been for the past decade. For retirement income, they remain the best tool available to most people.

The practical implication: save into your pension for your retirement, not for your children's inheritance. If passing wealth on is a priority, you'll need a broader estate planning strategy that doesn't rely solely on pension preservation.

Check Where You Stand

If you're unsure how this affects your retirement plan, start with the basics. Use our free pension calculator to see your projected retirement income across different scenarios — including what happens if you draw down earlier or adjust your contribution strategy in light of these changes.

Understanding your numbers is the first step to making the right decisions.