Pensions & Inheritance Tax: The April 2027 Changes

One of the biggest changes to estate planning in years is now law. From 6 April 2027, most unused pension funds will be counted as part of your estate for inheritance tax — reversing a long-standing position where pensions could usually be passed on tax-efficiently. Here's what's changing and what it means for your family.

What's changing

Until now, most defined contribution pensions have sat outside your estate, which made them a tax-efficient way to pass on wealth. From 6 April 2027, most unused pension funds and pension death benefits will be brought within your estate for inheritance tax purposes. The change was legislated in the Finance Act 2026 and applies to deaths on or after that date.

Who's affected

HMRC estimates that of around 213,000 estates with inheritable pension wealth in 2027–28, roughly 10,500 estates will face an inheritance tax bill where they previously wouldn't, and around 38,500 will pay more than before. Where pension assets push an estate into tax, the average additional liability is expected to be about £34,000.

What's excluded

• Spouses and civil partners: anything left to them remains exempt from inheritance tax, as it is for other assets.
• Death-in-service benefits: lump sums paid from a registered pension scheme on death in service are excluded from the estate.

Who pays, and how

Your personal representatives — the people who administer your estate — are responsible for reporting and paying any inheritance tax due on the pension. Beneficiaries who receive pension funds can also become jointly and severally liable from the point they're appointed.

To help with the practicalities, personal representatives who expect tax to be due can direct the pension scheme to withhold up to 50% of the taxable benefits for up to 15 months from the date of death, so the tax can be settled before the rest is released to beneficiaries.

The double-tax trap on death after 75

Here's the part that catches people out. Even today, if you die after age 75, whoever inherits your pension pays income tax at their own marginal rate when they draw from it. From April 2027, the same fund may also be hit by inheritance tax — so a single pension pot can be taxed twice.

Take a £400,000 pension left to an adult child, on a death after 75 where the estate has already used its allowances:

• Inheritance tax at 40%: £160,000, leaving £240,000.
• If the child is a higher-rate taxpayer, income tax at 40% on what's drawn: a further £96,000.
• Combined, roughly £256,000 of tax on a £400,000 pot — an effective rate near 64%.

Not everyone will be affected this severely, and a spouse or civil partner inheriting still pays nothing. But it shows why reviewing how your pension fits your wider estate — well before 2027 — matters so much.

How to plan ahead

There's no one-size-fits-all answer, but the change makes a few things worth reviewing well before 2027:

• Check your overall estate against the inheritance tax allowances, now including your pension.
• Review your beneficiaries and how your pension and other assets are structured between partners.
• Consider life cover in trust. A policy written in trust can provide a tax-free lump sum to meet an inheritance tax bill, so your family isn't forced to draw down a pension or sell assets to pay it.

Because pensions, tax and protection all interact, this is an area where regulated advice really pays off. An adviser can model your position and help you put the right cover in place.

This guide is general information based on UK rules confirmed in the Finance Act 2026, not personal tax, financial or legal advice. Details may be subject to further guidance, and the right approach depends on your circumstances. Speak to a qualified adviser before acting.