One of the most significant changes in a generation. Here is what it means for your family.
This article is based on draft legislation. The pension inheritance tax changes are not yet in force. The information below reflects the government's published plans and HMRC's consultation responses as at early 2026. Some details may change before April 2027. We will update this article as the legislation develops.
Currently, most pension funds sit outside the estate for inheritance tax purposes. If you die with money left in your pension, that money generally passes to your chosen beneficiaries without any inheritance tax being charged on it.
From 6 April 2027, the government has announced plans to change this. Under the proposed rules, unused pension funds would be included in the estate when calculating how much inheritance tax is owed. This has not yet been confirmed in law and could change. This brings pensions into line with other assets like property, savings, and investments.
This matters because many people have been advised over the years to keep their pension untouched for as long as possible — spending other savings and investments first — specifically because the pension sat outside the estate. That advice may now need rethinking.
The impact depends on the size of your pension and the rest of your estate. For some families, the pension inclusion will push an estate that was previously below the tax-free threshold over it. For those already above, the bill gets larger.
The actual amount depends on several things — whether the pension passes to a surviving spouse or civil partner (which is exempt from inheritance tax), the size of the available tax-free allowances, and whether the estate is above the £2 million threshold where the residence nil-rate band starts to be reduced.
The changes mainly affect defined contribution pensions — the type where you have your own pot of money that can be passed on as a lump sum or through continued withdrawals by your beneficiaries. This includes personal pensions, self-invested personal pensions (SIPPs), and workplace defined contribution schemes.
Defined benefit pensions (the older type that pays a guaranteed income for life) work differently. They do not usually have an unused fund in the same way. Where a defined benefit scheme pays a continuing pension to a surviving spouse or dependant after death, that ongoing income is generally not caught by the new rules.
Death-in-service benefits — the life insurance provided by many employers through their pension scheme — are also expected to remain outside the scope of the new inheritance tax charge. However, if a death-in-service scheme pays a separate lump sum, the treatment of that lump sum depends on the scheme rules.
Inheritance tax is not the only tax that applies when someone inherits a pension. If the pension holder dies at age 75 or older, the person who inherits the pension usually pays income tax on any money they take out of it — at their own tax rate. This already happens under current rules and will continue alongside the new inheritance tax charge.
The government has said there will be rules to prevent the same money being taxed twice. Where income tax has been paid on pension money that was also subject to inheritance tax, there will be a way to reclaim the overlap. But the detail of how this works in practice is still being finalised.
From April 2027, the people dealing with the estate (the personal representatives) will be able to direct the pension provider to hold back up to 50% of the pension fund as a provisional estimate of the tax that may be due. This money can be held for up to 15 months while the full tax position is worked out.
This means that the people who inherit the pension may not receive the full amount for some time. Once the final tax calculation is agreed with HMRC, any excess held back is released. If too little was held, the remaining tax is collected from the estate.
Worth knowing. Paying tax from the pension fund itself does not reduce the bill. It simply means the tax on the pension comes from the pension, rather than from other assets in the estate. The total amount owed is the same either way.
The rules do not take effect until April 2027. That gives time to consider whether any changes to your approach might be worthwhile. Here are some things to think about:
Review the order in which you spend your money. If you have been preserving your pension and spending savings first, it may now make sense to take more from your pension while you are alive — paying income tax at your own rate (often 20%) rather than leaving the full amount to be taxed at 40% after death.
Consider taking pension income and gifting the surplus. If you take money from your pension and use it to make regular gifts to your family from income you do not need, those gifts can be immediately exempt from inheritance tax under the surplus income exemption. You pay income tax at 20% on the way out, but avoid inheritance tax at 40% after death. For every £25,000 drawn and gifted this way, your family could be £5,000 better off than if the money stayed in the pension.
Check who receives your pension when you die. Pension funds passing to a surviving spouse or civil partner remain exempt from inheritance tax. If your pension is currently set to pass to your children, the tax position changes significantly from April 2027. Updating the form that tells your pension provider who should receive your fund (your expression of wish or nomination form) takes five minutes and is worth reviewing after any major life event.
Understand how your pension interacts with the rest of your estate. Including the pension may push your estate above the £2 million threshold, which triggers a reduction in your residence nil-rate band. This makes the impact of the pension greater than just the 40% tax on the pension itself. Our calculator takes this interaction into account.
Our free inheritance tax calculator already includes the April 2027 pension changes. Enter your pension value alongside your other assets and it will show you the estimated impact — including how the pension interacts with the £2 million threshold and your available allowances.