Pensions and inheritance tax from April 2027

The biggest rule change in UK retirement planning

For a decade, defined-contribution pensions were the UK’s most generous inheritance vehicle. Money inside a pension sat outside your estate for inheritance tax, so the standard advice practically wrote itself: spend ISAs and taxable accounts first, leave the pension untouched, and pass it on tax-efficiently when you die.

That logic stops working on 6 April 2027. From that date, unused pension funds and most pension death benefits count as part of your estate for inheritance tax. This was announced in the October 2024 Budget and is now law (Finance Act 2026), so it is a certainty to plan around, not a proposal to wait out.

If you have read our drawdown guide and built a withdrawal plan around preserving the pension, this is the follow-up that plan needs.

The rules today (until 5 April 2027)

Pension pots paid out under a scheme’s discretion sit outside your estate — no inheritance tax, however large the pot.
If you die before 75, beneficiaries usually inherit the pot free of income tax too (within the £1,073,100 lump sum and death benefit allowance).
If you die at 75 or later, beneficiaries pay income tax at their own marginal rate as they draw the money — but still no inheritance tax.

The rules from 6 April 2027

Unused pension funds join your estate. Whatever is left in your DC pots when you die is added to your property, savings and investments when inheritance tax is worked out — 40% on the part of the total estate above your tax-free bands.
The income tax rules don’t change. Die at 75 or later and beneficiaries still pay income tax on withdrawals — now on money that may already have suffered 40% inheritance tax. The combined effective rate can reach 64% for a higher-rate beneficiary (67% additional rate). This double charge is what makes the change bite.
Your executors handle it. Personal representatives value the pensions, report them to HMRC and pay the inheritance tax (schemes will be able to pay HMRC directly from the pot, so the tax needn’t be found from other assets).

What stays outside the net

Anything left to a spouse or civil partner — the spousal exemption applies to pensions exactly as it does to the rest of the estate. Tax is only in question when money passes to the next generation.
Charity — pension funds left to a registered charity remain exempt.
Death-in-service benefits from a registered pension scheme are excluded.
Defined-benefit pensions to a dependant — a widow’s or dependant’s scheme pension is an income, not a pot, and stays out of scope.

Who actually pays

Inheritance tax only starts once the whole estate — house, savings, investments and now pensions — exceeds the tax-free bands: the £325,000 nil-rate band, plus up to £175,000 residence nil-rate band when a home passes to children or grandchildren. Both are transferable between spouses, so a couple leaving a family home to children can pass on up to £1 million tax-free. Both bands are frozen until April 2030, which is a stealth tightening all by itself.

Two honest observations:

Most estates will still pay nothing. A couple with a £400,000 house, £200,000 of ISAs and £300,000 of pensions stays under the £1 million line. The change matters most where pensions were the plan for staying under it.
Watch the £2 million taper. The residence nil-rate band shrinks by £1 for every £2 the estate exceeds £2 million — and pensions now count toward that threshold. Estates that were comfortably below it on paper may not be once a large SIPP is added in.

What to consider doing

None of this is personal advice — the right answer depends on your estate, health, family and how much you actually need to spend. But the levers are:

Revisit withdrawal ordering. “Pension last” is no longer automatic. For estates likely to face inheritance tax, drawing pension income up to a sensible tax band each year — paying 20% income tax now instead of 40% + income tax later — and spending or gifting it often beats hoarding the pot. For estates below the bands, the old tax-efficiency logic in the drawdown guide still applies unchanged.
Use the gifting exemptions. Gifts from surplus income (regular, documented, leaving your standard of living intact) are immediately outside your estate — a natural pairing with higher pension withdrawals. Larger one-off gifts fall out of your estate after seven years, and everyone has a £3,000 annual exemption.
Leave the pension to your spouse first. Fully exempt, and it gives the survivor years to run down the pot or gift from it before the second death — usually the single most effective move for couples.
Reconsider annuities. Converting part of a pot into guaranteed lifetime income removes it from the estate question entirely while solving longevity risk — one more reason annuities deserve a second look.
Check your expression-of-wishes forms. From 2027 the inheritance tax outcome depends on who benefits, so out-of-date nominations (an ex-partner, or children when your spouse should come first) now carry a tax cost as well as an emotional one.
Don’t panic-withdraw. Pulling money out early means paying income tax now, possibly at higher rates, and moving the money somewhere it also counts for inheritance tax — while losing tax-free growth. Money spent, gifted properly, or left to a spouse escapes the charge; money moved from a pension to a savings account does not.

If your estate is clearly above the bands — and especially above £2 million — this is genuinely a case for paying a regulated financial adviser for a one-off review before April 2027. The interactions between income tax bands, the taper and gifting rules are where professional fees earn their keep.

The one-line summary

From 6 April 2027, unused pension pots count in your estate for inheritance tax: the “spend everything else first, leave the pension” era is over. Spouses and charities remain exempt, most estates still owe nothing — but if yours is likely to pay, plan to use the pension (spend it, gift from it, or annuitise it) rather than preserve it.

Retirement drawdown — withdrawal ordering, tax bands and the mechanics this change rewrites
Annuities — converting a pot to lifetime income takes it out of the estate entirely
Pension tax relief — contributions still get relief going in; the change is about what happens at the end
State Pension and your NI record — the guaranteed floor that lets you spend the pot with confidence
ISAs — ISAs were always inside your estate; the playing field has now levelled
Financial Planner — model how faster pension withdrawals change what the pot supports

Last reviewed: August 2026.