The 2027 Pension IHT Overhaul: What You Need to Know

From 6 April 2027, unused pension funds and most pension death benefits are due to come into the scope of inheritance tax (IHT) for the first time. Pensions left to a spouse or civil partner stay exempt, and death-in-service lump sums are excluded, but money left in a pension for children or other beneficiaries could face IHT at 40% on top of any income tax. If you hold a large pension or are thinking about a defined benefit (DB) transfer for inheritance reasons, it is worth understanding how the new rules work.

IHT on Pension from 2027

The change was announced in the Autumn Budget 2024 and the government has since confirmed the main design. It reverses a principle that has shaped retirement and estate planning for years: that money left unspent in a pension usually sat outside your estate for IHT.

The government's reasoning is that pensions were increasingly being used to pass on wealth free of IHT, rather than to fund retirement. That trend grew after the pension freedoms of 2015 and the abolition of the Lifetime Allowance in April 2024, both of which made it more attractive to leave pension pots untouched for beneficiaries. The new rules are designed to bring pensions back towards their main purpose: paying an income in retirement.

It is worth keeping this in proportion. The government's own estimates suggest most estates with pension wealth will still pay no IHT. A minority will pay IHT for the first time, and some will pay more than they would have done under the old rules. You can read more about inheritance tax on gov.uk.

Some important exemptions remain. Anything passed to a surviving spouse or civil partner stays free of IHT. After consultation with the pensions industry, the government also confirmed that lump sum death-in-service benefits paid from registered pension schemes will stay outside IHT.

Here is a quick summary of what is changing.

Key Changes: Before vs After 6 April 2027

What	Before 6 April 2027	From 6 April 2027
IHT on unused DC pensions	Generally outside the estate and free of IHT	Added to the estate and potentially liable to IHT at 40%
Discretionary schemes	Trustees' discretion keeps funds outside the estate	Discretion no longer matters for IHT; most funds count towards the estate
Who deals with the IHT	Rarely relevant, as no IHT was usually due	The estate's personal representatives take primary responsibility
Death-in-service benefits	IHT-free if paid at the trustees' discretion	Stay outside IHT, whatever the scheme type
Planning approach	"Spend other assets first, keep pensions last" was common	That approach needs reviewing in the light of the IHT change

How Things Work Now (Until April 2027)

To see why the change matters, it helps to understand how favourable the current system is for passing on wealth. The current set-up grew out of a series of policy changes rather than being designed as an estate planning tool, but in practice it gave a strong incentive to leave pensions untouched. That is what the new rules aim to change.

The IHT Exemption and Discretionary Schemes

At present, most defined contribution (DC) pensions, such as SIPPs, personal pensions and workplace pension pots, are not treated as part of your estate for IHT.

This is because of how most pension schemes are structured. Most give the scheme trustees or administrator discretion over who receives the death benefits. When you complete an "expression of wish" or nomination form, you are giving guidance, not a legally binding instruction. Because you do not have absolute control over where the money goes when you die, the pension does not form part of your estate and usually escapes IHT.

The exception is the less common situation where scheme rules let you give binding directions. Where the discretion is removed, the pension can already count as part of the estate.

Tax Treatment on Death

Pensions currently avoid IHT, but they are not always free of tax on death. The income tax treatment depends on your age when you die.

Death before age 75: your beneficiaries can usually take the pension funds free of income tax, as long as the lump sums fall within your Lump Sum and Death Benefit Allowance (LSDBA). The standard LSDBA is £1,073,100, reduced by tax-free lump sums you took during your lifetime. Lump sums above the available allowance are taxed at the beneficiary's marginal rate of income tax.

Death at or after age 75: the IHT position is the same today, but anything the beneficiaries withdraw is taxed as their income at their marginal rate, so 40% for a higher-rate taxpayer.

Defined Benefit Schemes

DB (final salary) schemes work differently. On death they usually pay a dependant's pension to a surviving spouse, civil partner or eligible children. That pension is taxable income for the person who receives it, not a lump sum. Some DB schemes also pay lump sum death benefits, particularly on death in service or within a guarantee period. Under the current rules, these are usually free of IHT where they are paid at the trustees' discretion.

The New Rules from 6 April 2027: What Changes

The new system removes the IHT advantage of discretionary pension schemes. The value of most unused pension funds and pension death benefits will be included in your estate for IHT, whether or not the trustees have discretion over who receives them.

What Gets Hit by IHT

Based on the government's published policy, these pension assets are expected to be added to your other assets when your estate is valued for IHT from April 2027:

• Unused DC funds: the main target. This covers the remaining value in personal pensions, SIPPs and workplace DC schemes, whether or not you have started drawing from them.
• Inherited drawdown funds: if you inherited pension funds from someone else and hold them in drawdown, they are expected to count towards your own estate when you die.
• Illiquid pension assets: anything held inside a pension, including commercial property or unlisted shares in a SIPP. This can create a large IHT bill without providing the cash to pay it.
• DB lump sum death benefits: one-off lump sums from DB schemes, other than death-in-service benefits.

The precise list of what is in and out of scope depends on the final legislation and HMRC guidance, so check the current position on gov.uk or with a regulated adviser before relying on it.

What Stays Out of IHT

After the consultation, the government confirmed several important exclusions:

• Death-in-service benefits: lump sum death-in-service benefits from registered pension schemes stay outside IHT, whether or not they are discretionary.
• Dependants' scheme pensions: continuing pensions paid to dependants from DB arrangements.
• Joint-life annuities: income that continues to a surviving annuitant.
• Some small lump sums paid in place of a dependant's pension.

What's In and Out of Scope

Expected to be in scope for IHT	Expected to be out of scope
Unused DC pension funds	Death-in-service lump sums
Beneficiary drawdown funds	DB dependants' pensions
DB lump sum death benefits (not death-in-service)	Joint-life annuity payments to a survivor
Illiquid assets held in a pension	Pension funds left to a spouse, civil partner or charity

The Exemptions That Still Matter

Two long-standing IHT exemptions continue to apply to pension wealth.

Spouse and civil partner exemption: anything passed to a surviving spouse or civil partner stays free of IHT. This becomes one of the most important exemptions in pension planning.

Charity exemption: pension funds left to a registered charity are also free of IHT.

The spouse exemption creates a sharp difference between married couples and unmarried partners. Until now, an unmarried person could often leave their pension to a partner or to children without IHT. From April 2027 that will no longer be the case, so unmarried couples and people who want to leave money directly to children on the first death could see very different results.

How the New System Will Work

One of the trickiest parts of the change is the administration. The government originally proposed that pension scheme administrators would report and pay the IHT. After strong concerns from the industry about the practical problems, it changed course.

Personal Representatives Take Charge

Primary responsibility now sits with the personal representatives (PRs) of the estate, usually the executors named in the will. This matches how IHT works for other assets, but it puts a real burden on PRs, who are often grieving family members with no experience of tax administration.

PRs will need to find every pension scheme, get values from each one, work out the IHT on the whole estate and meet HMRC's deadlines, all while the main estate may not have enough cash to pay the pension share of the bill.

The New Process

The government's design relies on information passing between PRs, pension scheme administrators and beneficiaries. In outline:

1. Notification: the PRs identify the pension schemes and tell each administrator about the death.
2. Valuation: each administrator provides the value of the pension and death benefits within a set time.
3. Calculation: the PRs work out the total value of the estate and the IHT due.
4. Communication: the PRs tell beneficiaries and administrators how much IHT relates to the pension.
5. Payment: IHT is normally due six months after the end of the month of death. Interest is charged on late payment.

Payment Options

To help with the cash problem, there are expected to be several ways to pay the IHT that relates to pensions:

Paid from the estate: the PRs pay the full IHT bill from the estate's other assets and recover the pension share from the beneficiaries.

Paid by the pension scheme: beneficiaries can ask the scheme administrator to pay the IHT on their share directly to HMRC out of the inherited pension, subject to conditions set out in the rules.

Paid by the beneficiary: the beneficiary receives the benefits and pays their share of the IHT themselves. There are expected to be rules to stop the same money being taxed twice where income tax has already been deducted from an amount used to pay IHT.

The detailed thresholds, deadlines and conditions are set by the final legislation and HMRC guidance, so check those before relying on any specific figure.

Roles and Responsibilities

Who	What they do
Personal representative	Identify schemes, notify administrators, work out the IHT, submit the return, manage payment deadlines and recover tax from beneficiaries
Pension scheme administrator	Provide valuations, give information to PRs and beneficiaries, and pay IHT to HMRC when a beneficiary asks and the conditions are met
Beneficiary	Can become liable for IHT on their share, choose how it is paid and work with the PR and administrator

Illustrative Examples: What This Could Mean in Practice

These simplified examples show how the rules could work. They are illustrative only, use current IHT thresholds and assume the pension rules apply as announced.

Illustrative example: Susan

Imagine Susan, a widow with a £1.2 million estate made up of a £700,000 home and a £500,000 SIPP. She wants to leave everything to her two adult children.

If she dies before 6 April 2027:

• The SIPP passes outside the estate for IHT.
• Estate for IHT: £700,000 (the home).
• Using her own and her late husband's nil-rate bands (£325,000 each) and residence nil-rate bands (£175,000 each), her threshold is £1 million.
• IHT bill: £0, as the estate is below the threshold.

If she dies after 6 April 2027:

• The SIPP is included in the estate.
• Estate for IHT: £1.2 million.
• Threshold: still £1 million.
• Taxable amount: £200,000.
• IHT bill: £80,000 (40% of £200,000).

The same family and the same assets produce an £80,000 IHT bill that would not have existed before.

The Double Tax Trap

Where someone dies at 75 or over, the pension may face IHT first and then income tax when the beneficiary takes the money out.

Imagine a £100,000 pension inherited from someone who died after 75, where the beneficiary is a higher-rate taxpayer and no IHT allowance is left:

• IHT: 40% of £100,000 = £40,000
• Remaining fund: £60,000
• Income tax on withdrawal: 40% of £60,000 = £24,000
• Total tax: £64,000
• Beneficiary receives: £36,000

That is an effective tax rate of 64% on the inherited pension. The exact outcome depends on the beneficiary's own tax position and how the final rules treat the interaction between the two taxes.

The Residence Nil-Rate Band Taper

There is a less obvious effect involving the residence nil-rate band (RNRB). This is an extra IHT allowance of up to £175,000 when a home passes to direct descendants. It is tapered away for larger estates, reducing by £1 for every £2 that the estate is worth over £2 million. You can read how it works on gov.uk.

Adding a large pension to the estate can push it over £2 million and reduce or remove the RNRB.

Imagine an estate with a £1.3 million home, £600,000 of other assets and a £700,000 pension:

Before April 2027: the estate for IHT is £1.9 million, below £2 million, so the full £175,000 RNRB is available.

After April 2027: the estate is £2.6 million, which is £600,000 over the threshold, so the RNRB is lost completely.

The result is IHT at 40% on the pension and the loss of a £175,000 allowance on the home, which adds a further £70,000 of IHT that would not otherwise be due.

Who Is Most Affected by the 2027 IHT Pension Changes?

The changes reach widely, but some groups will feel them more than others:

• People with larger estates: those whose pensions, property and other assets together take them above the nil-rate band (£325,000 each) and, where it applies, the residence nil-rate band (£175,000 each when a home passes to direct descendants).
• People who planned to pass on their pension: anyone who deliberately left their pension untouched and spent other assets first, so as to leave a larger IHT-free pension to children or other beneficiaries.
• Unmarried couples: because the spouse and civil partner exemption does not apply between unmarried partners.
• People thinking about a DB transfer for inheritance reasons: the ability to pass on a SIPP outside the estate was one of the arguments sometimes made for transferring out of a DB scheme. From April 2027 that argument is much weaker.

What the Changes Mean If You Have a DB Pension

A DB pension pays a guaranteed income for life, often with a pension for a surviving spouse or civil partner. It does not usually leave a pot of money to pass on, so the IHT change affects it less directly. Dependants' pensions are expected to stay outside IHT, although one-off DB lump sum death benefits (other than death-in-service) are expected to be in scope.

If you have been thinking about transferring a DB pension to a SIPP so you can pass the fund on to your family, the 2027 change matters. Once pension funds count towards the estate, a transferred fund left to children could face IHT, and possibly income tax as well. Meanwhile, you would have given up a guaranteed, inflation-linked income that you cannot outlive.

The FCA's starting assumption is that a transfer is unlikely to be suitable for most people. If your safeguarded benefits are worth more than £30,000, the law requires you to take advice from an FCA-authorised adviser with the pension transfer permission before you can transfer. Our guide to defined benefit pensions explains the benefits you would be giving up, and our page on the transfer value of a pension explains how a CETV is worked out.

How the IHT Change Fits With Other Pension Rules

The IHT change sits alongside other recent reforms:

• Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA): the Lifetime Allowance was abolished from 6 April 2024. The LSA (£268,275 for most people) limits the tax-free cash you can take in your lifetime. The LSDBA (£1,073,100 for most people) limits the total of tax-free lump sums paid in your lifetime and on death before 75. These are income tax allowances and are separate from IHT, so the same money can be affected by both.
• Normal minimum pension age: the earliest age most people can take their pension rises from 55 to 57 on 6 April 2028, although some people have a protected pension age. This affects when you can access your pension, while the 2027 change affects what happens to it after you die.

Planning Points to Review Before April 2027

The changes mean many people will want to look again at how their pensions fit with the rest of their estate plan. These are points to discuss with a regulated financial adviser, not steps everyone should take.

Rethinking "Pensions Last"

The common approach of spending ISAs and other savings first and keeping pensions to last may no longer suit everyone. For some estates likely to pay IHT, it could make more sense to draw more from the pension during your lifetime, paying income tax at your marginal rate, rather than leaving it to face IHT at 40% and possibly income tax again later. Bear in mind that ISAs and cash also count towards your estate for IHT, so moving money from a pension into an ISA does not by itself take it outside the estate. The right order depends on your tax position, your health, your income needs and what you want to leave.

The Spouse and Civil Partner Exemption

For married couples and civil partners, the spouse exemption becomes a key part of pension planning. Leaving pension funds to a surviving spouse or civil partner is free of IHT and delays any IHT until the second death, which gives more time to plan.

Review Your Nominations

It is worth reviewing your expression of wish or nomination forms with every pension provider. They will no longer keep a pension outside IHT, but they still guide who receives the money. Out-of-date nominations could lead to funds going to a former partner, or to a beneficiary who is not exempt, and trigger an IHT charge you did not expect.

Lifetime Gifting and Trusts

Reducing the value of your estate during your lifetime can help. The annual gift exemption, gifts out of surplus income, and larger gifts that become exempt if you survive seven years can all reduce the non-pension estate. Trusts can also be useful for other assets. MoneyHelper and gov.uk explain the main gifting rules.

Make Sure the Estate Has Cash

Consider whether your estate will have enough cash to pay any IHT that relates to your pensions. Without it, your PRs may need to sell assets such as the family home, or wait for beneficiaries to access pension funds. Life insurance written in trust to cover an expected IHT bill is a long-established option that may now be relevant to more people.

Business Owners and Pension Property

Business owners who hold commercial premises inside a pension should take regulated advice in good time. The pension could face an IHT bill on the value of the property while the estate has no easy way to raise the cash, which could force a sale of the premises.

Frequently asked questions

Will my final salary pension be subject to IHT after 2027?

A regular dependant's pension paid to a surviving spouse, civil partner or dependant is expected to stay outside IHT. It is taxed as the recipient's income. However, one-off lump sum death benefits from a DB scheme, other than death-in-service benefits, are expected to come into scope.

Are death-in-service benefits still IHT-free?

Yes. The government has confirmed that lump sum death-in-service benefits paid from registered pension schemes stay outside IHT.

What if my estate lacks cash to pay pension IHT?

Beneficiaries are expected to be able to ask the pension scheme to pay the IHT on their share directly to HMRC from the inherited pension, subject to conditions. Without that, personal representatives may need to borrow against estate assets or sell property such as the family home.

Does the spousal exemption still apply to pensions under the new 2027 IHT rules?

Yes. The spouse and civil partner exemption continues. Pension funds can still pass to a surviving spouse or civil partner free of IHT.

How do the new pension IHT rules interact with the Lump Sum and Death Benefit Allowance (LSDBA)?

They are separate. The LSDBA (£1,073,100 for most people) is an income tax allowance that limits tax-free lump sums, including those paid on death before 75. The 2027 change brings pension values into IHT. Both can apply to the same money, which is why the combined tax on an inherited pension can be high.

Should I take more money out of my pension now?

There is no single answer. Taking money out during your lifetime is taxed as income at your marginal rate, and anything you do not spend still counts towards your estate. Whether drawing more makes sense depends on your age, health, income, other assets and what you want to leave. It is a question for a regulated financial adviser who can model your own figures.

Should I transfer my DB pension before 2027 because of these changes?

The 2027 change makes the inheritance argument for transferring a DB pension weaker, not stronger, because a transferred fund is expected to count towards your estate. A DB pension gives a guaranteed income for life that is very hard to replace. The FCA's starting assumption is that a transfer is unlikely to be suitable for most people, and if your safeguarded benefits are worth more than £30,000 you must take regulated advice from an adviser with the pension transfer permission first.

Getting Help and Guidance

The rules for passing on pensions have changed a great deal. The end of IHT-free pensions for most people, the new administrative duties for executors and the risk of paying both IHT and income tax mean that older assumptions may no longer hold.

Free, impartial guidance is available from MoneyHelper, and if you're 50 or over you can book a Pension Wise appointment about your DC pensions. Be wary of anyone who contacts you out of the blue about your pension or promises to help you "beat" the new tax rules, and check the FCA's ScamSmart pages first.

I don't give pension transfer advice. If you have a DB pension and want to understand how transfers and the advice process work, you can book a free, no-obligation chat. It's general information, not advice. If you then want regulated advice, I can introduce you to an FCA-authorised firm that holds the pension transfer permission. Arthur Browns may receive a fee from the firm we introduce you to if you become their client. Introductions are for UK residents with a transfer value of £50,000 or more. Below that, MoneyHelper is a good place to start.

This article is general information based on the rules as announced at the time of review. It is not tax or financial advice. Tax rules can change, and how they apply depends on your circumstances. Please read our important information.