Can your pension be held back for inheritance tax from 2027?

From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased person's estate for inheritance tax purposes. HMRC explains the change in its technical note on inheritance tax on pensions.

That is a major shift. Under the current system, many defined contribution pensions are usually outside the estate for inheritance tax because of the way pension schemes are structured. That has made pensions attractive not only as retirement savings, but also as a way of passing wealth to beneficiaries.

The government wants pensions to be used primarily to fund retirement, rather than as a tax-efficient inheritance vehicle. Whether you agree with the policy or not, the planning consequence is clear: pension drawdown, retirement spending and inheritance planning can no longer be treated as separate questions.

Yes, but the headline version needs careful handling.

HMRC's policy paper on unused pension funds and death benefits says personal representatives will be responsible for reporting and paying any inheritance tax due on unused pension funds and pension death benefits. If they reasonably expect inheritance tax to be due, they can direct pension scheme administrators to withhold 50% of taxable benefits for up to 15 months and pay inheritance tax to HMRC before releasing the rest to pension beneficiaries.

This does not mean a pension scheme can simply hold back half of your pension while you are alive. It applies after death, where pension death benefits may be subject to inheritance tax, and where the estate's personal representatives need to make sure the tax position is dealt with.

The tax itself is only part of the problem. The practical issue is that unused pension wealth may now create delay, paperwork and uncertainty after death.

Personal representatives may need to identify pension schemes, obtain values, understand who the pension beneficiaries are, work out whether inheritance tax is due, and coordinate payment with HMRC and pension scheme administrators. Royal London's technical note on pension death benefits from April 2027 highlights the new responsibilities placed on personal representatives and pension schemes.

That creates a very real planning question. If a pension pot is large, the home is valuable, and the estate has limited cash, the family may face a liquidity problem. The estate may be valuable on paper, but awkward to administer in practice.

For years, a common planning idea was to spend non-pension assets first and leave pensions untouched for as long as possible. In some cases, that still may make sense. But from April 2027, it should not be treated as an automatic rule.

The old question was: will my pension last?

The new question is: what happens if it does?

If someone spends ISAs, cash and taxable investments while preserving a large pension pot, they may improve flexibility during life but leave more pension wealth exposed to inheritance tax after death. On the other hand, drawing too much from a pension too quickly can increase income tax, reduce later-life security and leave less flexibility if circumstances change.

That is why this is not a simple instruction to withdraw more pension money. It is a modelling problem. You need to compare retirement income, pension withdrawals, tax, estate value and beneficiary outcomes together.

The 2027 inheritance tax change sits alongside a wider shift in the UK pension system. Planiva's guide to the Pension Schemes Act 2026 explains reforms around small pots, value for money, guided retirement and pension dashboards.

Those reforms may help make the pension system more organised, but they do not remove the need for personal planning. You still need to understand your own pension pots, State Pension timing, tax position, drawdown options and estate planning goals.

In fact, the new inheritance tax treatment makes that more important. If unused pension wealth is going to be counted for inheritance tax, then finding old pensions, understanding their value and modelling how they may be used becomes part of both retirement planning and inheritance planning.

This is also where the 'retire poor, die rich' problem becomes more important. Some people preserve wealth so cautiously that they under-spend in retirement, keep too much locked away in pensions or property, and leave behind an estate that creates tax and administration issues for their family.

Planiva's article on retiring poor and dying rich looks at that behavioural risk in more detail. The 2027 pension inheritance tax change gives it a sharper edge.

The point is not that everyone should spend more. Some households need to preserve capital, support a surviving spouse, protect against care costs or leave money for children. But preserving wealth by default is different from preserving it deliberately.

A better plan asks what each asset is for. Is the pension there to fund spending? Is the ISA there for flexibility? Is the property part of the inheritance plan? Is cash available for estate costs? Are beneficiaries likely to need money quickly? These questions sit between retirement planning and inheritance planning.

The right answer will depend on the household, but these three scenarios are worth testing before making big decisions.

The 2027 inheritance tax change may also affect how some households think about annuities and drawdown. A drawdown pot can leave unused pension wealth behind. An annuity can provide guaranteed income but may leave less residual pension value, depending on the type chosen.

That does not make one automatically better than the other. Planiva's guide to annuity or drawdown explains why the better question is often how much secure income you need, how much flexibility you want, and what trade-offs you are prepared to accept.

Income tax also matters. Pension withdrawals are usually taxable, apart from available tax-free lump sum entitlement. Drawing more pension in a single year may push more income into higher tax bands. The 2027 inheritance tax change should therefore be modelled alongside income tax, not in isolation.

The inheritance tax change also makes pension records more important. If executors or personal representatives do not know where pensions are held, it may be harder to value the estate, work out whether inheritance tax is due, and deal with pension beneficiaries.

That links to the wider pensions dashboard programme and the problem of lost pension pots. Planiva's article on pensions dashboards and lost pension pots explains why tracing old pensions matters before retirement.

From 2027, it may matter after death too. A missing pension is not just a forgotten retirement asset. It could affect the inheritance tax position of the estate.

This is not a reason to panic or make rushed pension withdrawals. It is a reason to review the plan while there is still time.

Start with the basics. Make sure you know where your pensions are, who your nominated beneficiaries are, what your will says, and whether your executors would be able to find the information they need.

Planiva is designed around the idea that financial planning decisions are connected. Retirement planning is not only about whether money lasts. Estate planning is not only about what happens after death. The two now overlap more clearly.

Use the Retirement Planner to model retirement ages, State Pension timing, pension withdrawals, spending patterns and projected remaining balances. Then use the Estate & Inheritance Planner to explore how remaining assets may affect estate value, inheritance tax exposure and beneficiary outcomes.

The goal is not to replace advice. The goal is to make the conversation more informed. Before you change pension withdrawals, gift money, buy an annuity, preserve property wealth or restructure an estate, you need to see the shape of the trade-off.

The following sources informed this article and are useful if you want to go deeper.

The 50% withholding rule is real, but it is not the main story. The main story is that unused pension wealth may become part of the inheritance tax calculation from April 2027.

That changes the retirement planning conversation. It is no longer enough to ask whether your pension will last. You also need to ask what happens if you leave a large pension behind.

For some households, preserving pension wealth may still make sense. For others, the better answer may involve drawing differently, spending differently, using secure income, reviewing estate plans, or taking advice before the rules take effect.

The strongest plan is not the one that blindly avoids tax or blindly preserves wealth. It is the one that connects retirement income, tax, property, pensions and inheritance into one joined-up view.