The rules that kept your pension outside inheritance tax are ending. Here is what that means for a pension of this size.
This change is now law. The Finance Act 2026 received Royal Assent on 18 March 2026. From 6 April 2027, most unused pension funds and pension death benefits will be included in your estate for inheritance tax. The change applies to deaths on or after 6 April 2027. Deaths before that date remain under the current rules.
If you are retired with around £500,000 in a defined contribution pension, such as a SIPP, personal pension, or workplace pot, that money currently passes to your beneficiaries free of inheritance tax. From 6 April 2027, it will count as part of your estate.
Whether that creates a tax bill, and how large, depends on two things: who inherits the pension, and the size of the rest of your estate. If it passes to your spouse or civil partner, there is no inheritance tax: the issue is deferred, not removed. If it passes to children or other beneficiaries, and your other assets already use up your tax-free allowances, the pension could face tax at 40%, up to £200,000 on a £500,000 fund. For the full detail of what is changing and how the tax will be collected, see our complete guide to inheritance tax on pensions from April 2027.
Susan is 70, divorced, and retired. She owns her home, holds savings and investments, and has left her SIPP largely untouched, following the long-standing guidance to spend other assets first because the pension sat outside her estate. Everything passes to her two children.
Susan's tax-free allowances total £500,000: the standard nil-rate band of £325,000 plus the £175,000 residence allowance for leaving her home to her children. Under current rules, only her home and savings count, so £200,000 of her estate is taxable. From April 2027, her pension is added, and the taxable amount rises to £700,000. The entire pension sits above her allowances, so effectively the whole £500,000 is taxed at 40%.
Inheritance tax is not the end of it. If you die at age 75 or older, whoever inherits your pension also pays income tax at their own rate on money they withdraw from it. This rule already exists. What changes in 2027 is that inheritance tax now applies first, before your beneficiaries draw anything out.
The combined effect can exceed 60% of the fund. Not every family will face the full amount, since beneficiaries can spread withdrawals across years to manage their income tax rates, but for higher earners inheriting a substantial pension, the loss is severe.
Anything left to a spouse or civil partner remains fully exempt from inheritance tax, including pension funds. For couples, the 2027 change usually shifts the problem to the second death, when the combined estate, including both pensions' remaining funds, passes to the next generation. A couple can have up to £1 million in combined allowances, but a home, savings, and two pensions can readily exceed that.
Worth knowing. If your pension is set to pass to your children rather than your spouse, the 2027 change affects you on the first death, not the second. The form that tells your pension provider who receives your fund, your expression of wish, takes five minutes to review and is often years out of date.
There is a further effect for larger estates. Once your total estate exceeds £2 million, the £175,000 residence allowance is gradually withdrawn. A £500,000 pension added to an estate of £1.6 million pushes past that threshold, so the pension not only attracts tax itself, it can strip away an allowance you would otherwise have kept. In that band, the effective tax rate reaches 60%.
The change is confirmed, but it applies only to deaths from 6 April 2027, which means the months between now and then are the window in which your options are widest. Broadly, the actions worth considering fall into four areas:
Rethink your spending order. The old logic of preserving the pension and spending everything else first may now be exactly backwards. Drawing pension income taxed at 20% during your lifetime can be far better than leaving it to be taxed at 40% or more after death.
Gift from income you do not need. Regular gifts made from surplus income are immediately exempt from inheritance tax. Drawing from the pension and gifting the surplus converts a 40%-taxed asset into a tax-free transfer, at the cost of income tax on the way out.
Review your nominations. Whether your pension passes to your spouse or your children determines whether tax arises on the first death or the second, and the right answer differs family to family.
Look at the whole estate, not the pension alone. The pension interacts with your allowances, the £2 million taper, and everything else you own. The right actions depend on your complete position, which is exactly what our assessment is built to show you.
Our free assessment already includes the April 2027 pension rules. Enter your pension alongside your other assets and it will show your estimated liability under the new rules, including the interaction with your allowances and the £2 million threshold, and which planning actions apply to your situation.