Inheritance Tax on Pensions From April 2027: What Families Need to Review Now
By Georgia Holmes
Discover how the April 2027 Inheritance Tax changes could affect unused pension funds and death benefits, who may be liable for tax, and what families should review now.
Pensions have traditionally played an important role in retirement planning and passing wealth to the next generation. Many people have chosen to preserve their pension savings while using other assets to fund retirement, partly because unused pension funds could often be passed to beneficiaries outside their estate for Inheritance Tax (IHT) purposes.
That is set to change.
From 6 April 2027, most unused pension funds and pension death benefits will be brought within the scope of UK IHT under legislation enacted in 2026. The change means families may need to reconsider how they balance pension saving, retirement income, lifetime gifting and estate planning.
The reform does not mean every pension payment will automatically incur IHT. The outcome will depend on the type of pension, the benefits payable, the value of the estate, available exemptions and the circumstances of the beneficiaries.
Understanding what is changing now can help families prepare before the new rules take effect.
What is changing from April 2027?
For deaths occurring on or after 6 April 2027, most unused pension funds and relevant pension death benefits will be included when calculating IHT.
Previously, many defined contribution pension funds could be passed to beneficiaries without being included in the deceased's estate for IHT purposes, particularly where the pension scheme administrator or trustees had discretion over who received the benefits.
Under the new rules, unused pension wealth will generally be taken into account even when the pension is held separately from the assets covered by a will.
This could affect people with substantial pension savings, individuals who have deliberately retained pension funds rather than spending them in retirement, and families who expect to inherit a combination of property, investments and pension benefits.
The change applies according to the date of death, not simply when the pension benefits are eventually paid. If a scheme member dies before 6 April 2027, the previous IHT rules generally apply to their pension benefits even if payment to beneficiaries takes place later.
Which pensions and benefits are affected?
The reform covers most unused funds in registered pension schemes, as well as relevant pension death benefits and certain qualifying overseas pension arrangements.
For many people, this will principally concern defined contribution pensions, including personal pensions and workplace schemes where the remaining fund can be passed to beneficiaries.
However, there are important exceptions and distinctions.
Death-in-service benefits payable from registered pension schemes are excluded from the deceased's estate for IHT purposes under the new rules. Continuing annuities and certain other excluded benefits also receive specific treatment.
The position can be different for defined benefit pensions, which promise an income rather than providing an individual investment pot. Certain continuing dependant's pensions are treated differently from unused defined contribution funds.
It is therefore important not to assume that every benefit linked to a pension will be treated identically. Families should establish what type of pension is involved, which benefits would be payable on death and how those benefits are classified under the legislation.