Pensions and Inheritance Tax: what the April 2027 changes mean for your family

For most of the last decade, pensions have been one of the most tax-efficient ways to pass money to the next generation. Money left in a pension pot usually sat outside your estate, so it escaped Inheritance Tax (IHT) altogether. That is about to change, and it is one of the most significant shifts in estate planning for a generation.

From 6 April 2027, most unused pension funds and pension death benefits will be counted as part of your estate when working out any Inheritance Tax due. The change was confirmed in the Finance Act 2026, which received Royal Assent in March 2026, so this is now law rather than a proposal. It applies to people who die on or after that date.

Inheritance Tax is charged at 40% on the value of an estate above the available allowances. Everyone has a nil-rate band of £325,000, and many people also have a residence nil-rate band of up to £175,000 when a home passes to children or grandchildren. Anything above those thresholds is potentially taxable. Both bands are frozen until at least April 2031, which means that as house prices and savings grow, more families are quietly pulled into the net - an effect often called fiscal drag.

Until April 2027, money you leave in a defined contribution pension (a SIPP or a modern workplace pension, for example) generally does not form part of that taxable estate. That is why advisers have often suggested drawing on other savings first and leaving the pension untouched.

From 6 April 2027, the value of most unused pension funds will be added to the rest of your estate before Inheritance Tax is calculated. Two important exemptions survive:

• Anything passing to a surviving spouse or civil partner is generally free of Inheritance Tax, as it is today. From 6 April 2025, the relevant cross-border framework is based on long-term UK residence rather than domicile. Specialist advice is needed where the person making the transfer is a long-term UK resident and the receiving spouse or civil partner is not, because the exemption may be restricted; transitional provisions may also be relevant.
• Anything passing to a registered charity remains exempt too.

Death-in-service benefits paid from a registered pension scheme are also being kept out of scope. But for many families, particularly those who intended to pass a pension to adult children, the picture is materially different.

There is a second layer to be aware of. If you die at age 75 or over, the person who inherits your pension already pays Income Tax at their own rate when they draw money from it. From April 2027, that same pot may also be inside your estate for Inheritance Tax. Where both apply, the combined effect can push the overall tax on that money well above 60%. This is not true for every estate - it depends on the size of the estate, who inherits, and your age at death - but it is the scenario worth understanding.

It is easy to read headlines like this and assume the worst. In reality, the Government estimates that of the roughly 213,000 estates each year that include pension wealth, around 10,500 will face an Inheritance Tax bill they would not have faced before, with a further 38,500 or so paying more than they otherwise would. The majority of estates will still have no Inheritance Tax to pay. If your estate is comfortably within the allowances, this change may not affect you at all.

There is no need to act rashly, but there is time to plan properly. Depending on your circumstances, the conversations worth having include reviewing your expression of wish or nomination forms so they still reflect your intentions, checking that your will and your pension nominations are pointing in the same direction, and thinking about whether spending or gifting during your lifetime now makes more sense than leaving a large pot untouched. Life cover written in an appropriate trust can also help beneficiaries meet a tax bill without having to raid the pension itself.

One practical wrinkle: from April 2027, the personal representatives of your estate - your executors - will be responsible for reporting and paying any Inheritance Tax on your pension. Where they reasonably expect Inheritance Tax to be payable, they may direct a pension scheme to withhold up to 50% of taxable benefits for up to 15 months while the position is resolved. Choosing executors who are up to the task, and making sure they understand the pension side, matters more than it used to.

We model what the 2027 change means for your estate, and help you weigh nominations, gifting and cover so more of your wealth reaches the people you intend.