Pensions and inheritance tax from 2027, what is changing

For many people, pensions have been seen as one of the cleaner assets to leave behind. That view came largely from how pension death benefits have often been treated for inheritance tax, or IHT, especially where trustees or scheme administrators had discretion over who received them.

The government has set out plans to bring most unused pension funds and death benefits into scope of IHT from 6 April 2027. That does not mean every family with a pension will face a tax bill, but it does mean pensions may no longer sit as neatly outside estate planning as many people assumed. The direction of travel was set out in the Autumn Budget 2024 and developed further in later HMRC papers.

The broad policy position is that, for deaths on or after 6 April 2027, most unused pension funds and pension death benefits are expected to be included within the value of a person's estate for IHT purposes. HMRC sets this out in its policy paper on Inheritance Tax: unused pension funds and death benefits.

In plain terms, if someone dies with untouched or partly unused pension wealth, that value may be much more relevant to the estate tax calculation than before. The core point is simple, pension wealth may matter more in the estate calculation than many households have been used to.

Under the current framework, many pension death benefits have often fallen outside the taxable estate in practice where benefits were paid under discretionary arrangements. HMRC's own manual helps explain why this became such a common planning assumption, even though pensions have never been completely outside IHT in every case.

You can see that background in the HMRC manual at IHTM17051 and IHTM17041. The planned reform matters because it changes that practical starting point for a large part of the market.

It is easy to overstate this change. Bringing more pension wealth into the estate calculation is not the same thing as saying every pension becomes taxable at 40 percent. Many estates will still fall below the available thresholds, and the normal exemptions and allowances still matter.

That includes the nil-rate band, the residence nil-rate band where conditions are met, and the spouse or civil partner exemption. GOV.UK keeps the main threshold guidance in one place at Inheritance Tax nil-rate band and residence nil-rate band. The practical effect will depend on the wider estate, not just the pension on its own.

One important exclusion has been clearly flagged. The government has said that death in service benefits payable from a registered pension scheme are expected to remain outside the value of the estate for IHT from 6 April 2027.

That distinction matters because people often group workplace death in service cover together with unused pension pots when they are not quite the same thing. The relevant HMRC material includes the paper on reforming inheritance tax for unused pension funds and death benefits and the related consultation outcome.

This change may also affect how some people think about using pension wealth during retirement. If a pension is no longer assumed to sit as neatly outside inheritance tax, some households may revisit whether it still makes sense to preserve as much of the pension as possible while spending other assets first.

That does not create one right answer. Keeping money in a pension can still offer flexibility, tax advantages and a useful investment wrapper in many cases. But the balance may look different where someone was mainly preserving pension wealth because they expected it to pass relatively efficiently on death.

For some households, these planned changes may shift the conversation from simply preserving pension capital to asking what the pension is there to do. If the goal is to support spending, cover core income needs or reduce uncertainty later in life, then annuities and more deliberate drawdown strategies may deserve a fresh look.

That does not mean annuities suddenly become the default, or that drawing down faster is automatically better. It means the trade-off may have changed. A pension that was once being protected partly for estate reasons may now be judged more on retirement income value, flexibility and timing. In practice, that is one reason to compare retirement scenarios in a Retirement Planner, then sense-check the knock-on effect in an Estate Planner.

This became one of the more practical parts of the debate. Earlier consultation material considered making pension scheme administrators responsible for reporting and paying the IHT due. After consultation, the government moved away from that approach.

The current direction is that personal representatives are expected to be responsible for reporting and paying any IHT due on unused pension funds and death benefits, rather than pension scheme administrators. That may sound technical, but it matters because it could make estate administration more involved for executors and families.

For most people, the useful response is not to rush into one decision. It is to review the moving parts that could now interact differently. That may include the expression of wish on pension arrangements, the will, the intended beneficiaries, and the balance between pension and non-pension assets.

This is also a reminder that retirement planning and estate planning are often connected. The more pension wealth someone leaves unused, the more relevant these rules may become. A scenario-based planning approach can help here because it lets you compare outcomes rather than rely on one assumption set.

The old shorthand that pensions sit outside inheritance tax is becoming less dependable. From April 2027, more unused pension wealth may need to be considered as part of the wider estate picture.

That does not automatically create an IHT charge, and it does not make one retirement strategy clearly right. It does mean the retirement income and estate planning conversation may need to be joined up more carefully. Where that matters to you, it can help to compare drawdown, annuity and estate assumptions side by side rather than rely on a single static answer.

Primary and reputable UK sources used for this article include: