Pension inheritance tax rules are changing from 6 April 2027, and thousands of families could face unexpected tax bills as a result.
Until now, most unused private pension funds have generally remained outside an estate for Inheritance Tax purposes. This has allowed many people to pass retirement savings to beneficiaries without an additional Inheritance Tax charge.
From April 2027, most unused pension funds and certain death benefits will be included when calculating the value of an estate. The change is already law under the Finance Act 2026, so it is no longer just a proposal.
With Inheritance Tax thresholds frozen until April 2031, reviewing your arrangements before the rules take effect could make a substantial difference to what your family inherits.
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Could the new pension inheritance tax rules affect your family? Download our full Pensions and Inheritance Tax report for a detailed explanation of the April 2027 changes, exemptions, worked examples and planning considerations.
1. Unused Pensions Will Become Subject to Inheritance Tax
One of the biggest pension inheritance tax changes concerns unused retirement savings when someone dies. From 6 April 2027, most unused pension funds and lump sum death benefits will form part of the estate for Inheritance Tax purposes.
This mainly affects personal pensions, Self Invested Personal Pensions (SIPPs), most defined contribution workplace pensions, money not yet accessed and funds remaining in pension drawdown. Most lump sum pension death benefits will also be included.
Previously, many people chose to preserve their pension during retirement because it could generally pass to beneficiaries free from Inheritance Tax. That advantage will largely disappear.
Defined benefit or final salary pensions are generally less affected because they typically provide an ongoing income rather than a fund that remains unused at death. Individual scheme arrangements still matter.
2. Some Pension Benefits Will Remain Exempt
The pension inheritance tax changes do not affect every type of benefit. Death in service lump sums from registered pension schemes and qualifying dependants’ scheme pensions remain outside the new charge.
The existing exemptions for benefits passing to a spouse or civil partner, or to a registered charity, also continue to apply.
For married couples and civil partners, this means the first death may bring little immediate Inheritance Tax impact if the pension passes to the survivor. The bigger issue may arise on the second death, when family wealth passes to children or grandchildren.
Families who previously nominated children as pension beneficiaries specifically to avoid Inheritance Tax should review those arrangements before April 2027.
3. Frozen Inheritance Tax Thresholds Could Increase Your Liability
The standard Inheritance Tax nil rate band remains £325,000. A residence nil rate band of up to £175,000 may also apply where the relevant conditions are met. Both are frozen until 5 April 2031.
The residence nil rate band starts to taper away when the estate exceeds £2 million. Including unused pensions could therefore push more estates above the available thresholds.
HMRC estimates that in 2027/28 around 10,500 estates will become liable for Inheritance Tax for the first time, while another 38,500 will pay more. Its analysis indicates an average increase of around £34,000 for affected estates.
Even a modest pension could change the overall tax position when combined with property, savings and investments.
Further information: GOV.UK Inheritance Tax guidance – https://www.gov.uk/inheritance-tax
4. A £150,000 Pension Could Create a £60,000 Tax Bill
Suppose someone dies leaving a home and savings that already use up their available Inheritance Tax allowances. They also have an unused SIPP worth £150,000, which they intend to leave to their adult son.
Under the previous rules, that pension could generally pass without Inheritance Tax. From 6 April 2027, it is included in the estate. If the entire £150,000 falls within the taxable portion of the estate, Inheritance Tax at 40% would be £60,000, leaving £90,000.
This is a simplified example. Unused allowances, exemptions and the value of the wider estate could reduce or eliminate the charge. Nevertheless, it illustrates why pension inheritance tax exposure is worth reviewing.
5. Beneficiaries Could Face Both Inheritance Tax and Income Tax
An inherited pension may also attract Income Tax when the beneficiary withdraws funds. Broadly, when someone dies before age 75, beneficiaries can normally receive qualifying inherited pension benefits free from Income Tax, subject to the relevant conditions. If the person dies aged 75 or over, withdrawals are generally taxed at the beneficiary’s marginal rate.
Those Income Tax rules are not changing, but from April 2027 Inheritance Tax may also apply to the unused pension.
Consider the same £150,000 pension where the holder dies aged 78. If £60,000 of Inheritance Tax is due, £90,000 remains. If a beneficiary then pays 40% Income Tax on all of that remaining amount, a further £36,000 would be due, leaving £54,000.
This is an illustrative calculation, not a prediction of an individual’s tax bill. Actual Income Tax depends on the beneficiary’s circumstances, withdrawal pattern and applicable rates.
Further information: GOV.UK tax on a private pension when someone dies – https://www.gov.uk/tax-on-a-private-pension-when-you-die
6. Pension Nominations and Wills Should Be Reviewed
Many people complete pension beneficiary nominations when joining a scheme and rarely revisit them. But an arrangement designed around the old Inheritance Tax treatment may no longer produce the intended result.
Check who is nominated to receive your pension, whether your will still reflects your wishes and whether your executors know about every pension you hold. It may also be worth considering whether suitable life cover could help beneficiaries meet a future tax liability.
Under the new rules, personal representatives will generally be responsible for reporting pension wealth and paying the associated Inheritance Tax, rather than pension providers. This makes accurate records and careful choice of executors particularly important.
7. Your Retirement and Estate Planning Strategy May Need to Change
A common retirement strategy has been to spend savings and other investments first while preserving pensions for beneficiaries. Because pensions generally sat outside the estate, this could have an Inheritance Tax advantage.
From April 2027, that advantage largely disappears for unused pension funds. Some people may want to reconsider when they draw retirement income, but this does not mean everyone should start withdrawing pensions immediately.
Pensions still offer important benefits, including tax relief on contributions, employer contributions and tax efficient growth. The standard annual allowance for 2026/27 remains £60,000, although restrictions can apply.
Existing Inheritance Tax gifting exemptions also remain available, including the £3,000 annual exemption and the seven year rule for many larger gifts. However, drawing pension funds to make gifts can itself trigger Income Tax.
The right approach depends on retirement income needs, other assets, family circumstances and the wider estate. Pension withdrawal and investment decisions should be discussed with a regulated financial adviser alongside tax advice.
Why Reviewing Your Position Before April 2027 Matters
The pension inheritance tax changes are expected to bring thousands more estates into the Inheritance Tax system. For some families, the effect will be limited. For others, including unused pension funds could substantially increase the tax payable.
Reviewing your pension nominations, will, executor arrangements and wider estate now gives you time to identify potential issues before April 2027.
At The Accounts Centre, we can help you understand the tax implications of the changes and work alongside your financial adviser where regulated pension advice is needed.
Download the Full Report
Want to understand how the April 2027 pension inheritance tax changes could affect your retirement savings and your family’s inheritance? Download our full Pensions and Inheritance Tax: Preparing for the April 2027 Changes report for exemptions, examples and practical planning considerations.
Frequently Asked Questions
Will pensions be subject to Tax from April 2027?
Yes. From 6 April 2027, most unused pension funds and certain pension death benefits will generally be included in the estate for Tax purposes.
Will my spouse pay Tax on my pension?
Pension benefits passing to a spouse or civil partner will generally remain covered by the existing Tax exemption.
Can children face both Inheritance Tax and Income Tax on an inherited pension?
Yes. Inheritance Tax may apply to the unused fund, and Income Tax may also arise when beneficiaries withdraw pension money, particularly where the pension holder died aged 75 or over.
Should I stop contributing to my pension?
Not necessarily. Pensions continue to provide valuable tax advantages. The change mainly concerns funds remaining unused at death.
What should I do before April 2027?
Review pension nominations, your will, the value of your wider estate and the information available to executors. Seek tax advice and regulated financial advice where appropriate.
Get in touch with us now to discuss your needs on
01244 917000 (Chester)
01829 332010 (Tattenhall)
0151 380 0104 (Liverpool).
Pension Inheritance Tax Changes
