Pensions and Inheritance Tax: What the April 2027 Changes Mean for You

Temple Blog·July 27, 2026·0 comments

For many years, pensions have played a dual role in financial planning: a source of income in
retirement, and — for those who didn’t need to draw on them fully — a highly tax-efficient way to
pass wealth on to the next generation. From 6 April 2027, that second role changes significantly.
Most unused pension funds and death benefits will be brought within the value of your estate for
Inheritance Tax (IHT) purposes.

This has been a long time coming. The change was first announced at the Autumn Budget in October
2024, went through consultation, and the legislation has now received Royal Assent as part of the
Finance Act 2026. In other words, this is no longer a proposal — it’s confirmed law, due to take
effect for deaths on or after 6 April 2027.

If you hold a meaningful pension fund, or you’ve been relying on “leave the pension untouched,
spend other assets first” as part of your estate plan, this is worth understanding properly. Below,
we’ve tried to set out the key facts as plainly as possible — what’s changing, who it affects, what’s
still protected, and the sort of questions it raises. As ever, there’s no single “right answer” here; the
best approach will depend on your own circumstances, so please treat this as background reading
rather than personal advice.

What’s actually changing

Under current rules, most pension death benefits sit outside your estate for IHT purposes, largely
because they’re typically paid at the discretion of the scheme trustees or administrator rather than
under the terms of your will. That discretionary structure is what has kept pensions outside the
scope of IHT.

From 6 April 2027, that protection is removed for most death benefits. Unused defined contribution
pots (also known as personal pensions), certain defined benefit (final salary pension) lump sums, and
other death benefits will generally be added to the value of your estate when working out whether
Inheritance Tax is due — regardless of whether they’re paid via trustee discretion or a
straightforward nomination.

Crucially, this only applies to deaths on or after 6 April 2027. If you or a loved one were to pass away
before that date, the current rules continue to apply even if the pension benefits are actually paid
out afterwards.

Who this is likely to affect

HMRC’s own estimate is that this will bring a meaningful minority of estates into an Inheritance Tax
charge that wouldn’t otherwise have faced one — particularly people who have built up substantial
pension savings and have other assets (property, savings, investments) that already use up some or
all of the £325,000 nil-rate band (plus the residence nil-rate band, where it applies).

It’s also relevant to anyone who has been deliberately drawing down other assets first and
preserving their pension, on the basis that it would pass to family free of IHT. That strategy, which
has been widely used and widely recommended for the best part of a decade, needs a fresh look.

What’s still protected

It isn’t all change, though. Some important exemptions and reliefs remain in place:

Spouses and civil partners – The normal spousal exemption continues to apply, so pension
death benefits left to a spouse or civil partner remain free of IHT, just as other assets are.

Registered charities – Death benefits left to charity remain outside the IHT charge.

Dependants’ scheme pensions – Ongoing pensions paid to a dependant (rather than one-off
lump sums) are generally excluded from the calculation.

Death-in-service benefits – Registered death-in-service benefits linked to employment
remain outside scope.

Joint-life annuities – Survivor benefits under a joint-life annuity are generally unaffected.

There’s also a partial safeguard against the two taxes overlapping on the exact same pound: where
Inheritance Tax is paid on a pension death benefit, the amount on which income tax is then charged
is reduced by the IHT already paid. In other words, income tax isn’t calculated on the full, pre-IHT
value of the pension. That said, as the next section explains, this doesn’t mean the overall bill ends
up small — because two separate taxes can still apply one after the other.

Age 75 — a distinction that still matters

One thing this change doesn’t remove is the long-standing income tax distinction based on how old
you are when you die, and it’s arguably become more important, not less.

Death before age 75 – Pension death benefits can generally still be paid to beneficiaries free of
income tax, as under current rules. From April 2027, however, the value may now also be brought
into your estate for IHT purposes — so a charge of up to 40% could apply there, even though income
tax isn’t in the picture.

Death at age 75 or later – Beneficiaries drawing on an inherited pension pay income tax on those
withdrawals at their own marginal rate — as they do now. From April 2027, this comes on top of any
IHT already charged on the pension within the estate. Because of the way the two taxes interact (IHT
first, then income tax on what’s left, as described above), the combined effect can be substantial.

Using widely-quoted industry modelling: a £100,000 pension, taxed at 40% IHT and then at the
beneficiary’s marginal income tax rate, could leave an additional-rate taxpayer with roughly £33,000
— an effective combined rate in the region of 67%. Some commentators have modelled even higher
effective rates for larger estates where other reliefs (such as the residence nil-rate band) are also
tapered away.

These figures come from professional and press commentary modelling the rules, rather than from
an official HMRC worked example — full HMRC guidance on the practical mechanics is still being
finalised. But the direction of travel is clear: for pensions inherited from someone who died at 75 or
over, the combined tax drag can be considerably higher than the IHT rate alone might suggest, and
this is a live concern that’s been raised with the government directly (including via a parliamentary
petition, to which the government responded in September 2025 defending the change while
confirming over 90% of estates will still pay no IHT at all).

How it will work in practice

Without getting too far into the mechanics, it’s worth knowing that responsibility for reporting and
paying any IHT due on pension assets will generally sit with your personal representatives (the
executors of your estate), working alongside your pension scheme administrator, who will value the
pension benefits and confirm how they’re being distributed. There will be a formal process for the
IHT to be paid — either from other assets in the estate, directly by beneficiaries, or via a “direct
payment” arrangement with the pension scheme — but that’s very much a matter for personal
representatives to work through at the time, guided by their solicitor and adviser.

Points worth thinking about

Every situation is different, and what follows are simply themes that tend to come up in
conversations about this change — not a checklist or a recommendation.

Nominations and beneficiary forms – It’s a good moment to check that your expression of wishes /
nomination forms with your pension provider still reflect who you want to benefit, given that
discretion no longer offers the same IHT advantage it once did.

The order in which you draw on your assets in retirement – Many people have been advised to
spend other savings first and preserve pension funds for as long as possible. With pensions now
potentially subject to IHT, that ordering may deserve a rethink for some people — though pensions
often still carry other tax advantages worth weighing up.

Gifting and lifetime planning – Lifetime gifting, trusts, and other established IHT planning tools
haven’t gone away, and some people may want to explore whether they now have a bigger role to
play.

Charitable giving – Because gifts to charity remain outside the scope of IHT, some people may want
to revisit how charitable wishes fit into their overall plan.

Protection – For some families, life insurance written in an appropriate way to cover a prospective
IHT liability may be worth discussing, so that beneficiaries aren’t left needing to fund a tax bill before
they receive the funds it relates to.

Age 75 timing – Given the extra income tax exposure that applies to beneficiaries once you’re 75 or
over at death, some people may want to think about how and when they draw on pension versus
other assets as they approach that age — though this needs to be weighed against the many other
tax advantages pensions still offer, and isn’t a decision to make in isolation.

Nothing needs to be rushed – The change doesn’t take effect until 6 April 2027, and further guidance
from HMRC is still expected between now and then. There’s time to plan properly rather than react
hastily.

A word of caution

This article is intended as general information to help explain a significant change in the pensions
and estate planning landscape — it is not personal advice, and it shouldn’t be used as the basis for
any decision about your own pension or estate. Everyone’s circumstances are different, and the right
approach for one person may not suit another. Tax treatment depends on individual circumstances
and may be subject to change in the future; HMRC guidance on some of the practical detail is still
being finalised.


If any of this raises questions about your own pension, estate, or wider financial plan, we’d
encourage you to get in touch so we can look at your specific situation together.

You can contact one of our independent advisers for personalised advice and support in making confident, informed decisions by using our Facebook or Contact Us pages, or speaking to a colleague in our office on 01329 282882. 

Please note: The content of this blog is for your general information purposes only and does not
constitute as financial advice.

A pension is a long-term investment not normally accessible until 55 (57 from April 2027). The fund
value may fluctuate and can go down, which would have an impact on the level of pension
benefits available. Your pension income could also be affected the interest rates at the time you
take your benefits. The tax implications of pension withdrawals will be based on your individual
circumstances, tax legislation and regulation which are subject to change in the future.

The Financial Conduct Authority does not regulate Estate and Tax planning.

Sources

The following sources were used to research and fact-check this article:

Temple Wealth

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