Pensions and Inheritance Tax from April 2027
You have spent decades building your pension. Until now, it has sat outside your estate for inheritance tax purposes — passing to your beneficiaries free of IHT. From April 2027, that changes. If you have a significant pension pot, your family could face a substantial and unexpected tax bill.
Pension IHT Changes at a Glance
What Is Changing in April 2027?
For the first time, unspent defined contribution (DC) pension pots will be included in the deceased's estate for inheritance tax purposes. This means the value of your pension — whether in accumulation or drawdown — will be added to your other assets when calculating the IHT liability on your death.
Currently, pensions sit entirely outside the IHT framework. A person with a £500,000 estate and a £400,000 pension pot is assessed for IHT only on the £500,000. From April 2027, they will be assessed on £900,000 — a dramatically different picture.
The government announced this change in the Autumn 2025 Budget. It applies to deaths occurring on or after 6 April 2027. This is the single biggest expansion of the IHT base in a generation, and it will bring millions of estates into the IHT net for the first time.
Which Pensions Are Affected?
Not all pensions are treated equally under the new rules. The key distinction is between defined contribution and defined benefit pensions:
Affected: Defined Contribution Pensions
- Personal pensions and SIPPs (Self-Invested Personal Pensions)
- Workplace defined contribution schemes
- Pensions in drawdown (where you are taking flexible income)
- Untouched pension pots still in accumulation
Generally Not Affected
- Defined benefit (final salary) pensions — where the scheme pays a continuing income to a surviving spouse or dependant, this is generally not included in the estate
- State pension — ceases on death and has no fund value to include
- Annuities already purchased — where the capital has been exchanged for a guaranteed income, there is typically no remaining fund to include (unless a guarantee period applies)
Lump sum death benefits from defined benefit schemes may still be affected. If your DB scheme offers a lump sum on death, check the scheme rules to understand how it will be treated.
How Will the Calculation Work?
The pension value will be added to your other estate assets (property, savings, investments, business assets) to arrive at a combined taxable estate. The standard IHT allowances and reliefs then apply as normal:
- Nil-rate band: £325,000
- Residence nil-rate band: up to £175,000 (if you leave your home to direct descendants)
- Spouse exemption: unlimited (if you leave everything to your spouse or civil partner)
- Transferable nil-rate band: if your spouse died first without using their NRB
Any remaining value above the available allowances is taxed at 40%.
Worked Example: The Impact on a Typical Estate
Helen has a house worth £350,000, savings and investments of £150,000, and an unspent pension pot of £300,000. Her late husband used none of his nil-rate band (everything passed to Helen under the spouse exemption). Helen plans to leave her estate to her two children.
| Before April 2027 | After April 2027 | |
|---|---|---|
| House | £350,000 | £350,000 |
| Savings & investments | £150,000 | £150,000 |
| Pension pot | Not included | £300,000 |
| Total estate | £500,000 | £800,000 |
| Less: NRB (own + transferred) | −£650,000 | −£650,000 |
| Less: RNRB (own + transferred) | −£350,000 | −£350,000 |
| Taxable estate | £0 | £0 |
| IHT at 40% | £0 | £0 |
In Helen's case, the combined NRB and RNRB allowances (including those transferred from her late husband) cover the estate even with the pension included. She faces no IHT under either scenario.
Richard has a house worth £550,000, investments of £250,000, and a pension pot of £400,000. His late wife used none of her allowances. He plans to leave everything to his son.
| Before April 2027 | After April 2027 | |
|---|---|---|
| House | £550,000 | £550,000 |
| Investments | £250,000 | £250,000 |
| Pension pot | Not included | £400,000 |
| Total estate | £800,000 | £1,200,000 |
| Less: NRB (own + transferred) | −£650,000 | −£650,000 |
| Less: RNRB (own + transferred) | −£350,000 | −£350,000 |
| Taxable estate | £0 | £200,000 |
| IHT at 40% | £0 | £80,000 |
Richard faces no IHT today, but after April 2027 his estate will owe £80,000 in inheritance tax — entirely because the pension pot is now included. This is money his son may need to find before probate is granted.
Margaret never married. She has a house worth £400,000, savings of £100,000, and a pension pot of £500,000. She leaves everything to her niece (not a direct descendant, so no RNRB applies).
| Before April 2027 | After April 2027 | |
|---|---|---|
| House | £400,000 | £400,000 |
| Savings | £100,000 | £100,000 |
| Pension pot | Not included | £500,000 |
| Total estate | £500,000 | £1,000,000 |
| Less: NRB | −£325,000 | −£325,000 |
| Less: RNRB | £0 (not eligible) | £0 (not eligible) |
| Taxable estate | £175,000 | £675,000 |
| IHT at 40% | £70,000 | £270,000 |
Margaret's IHT bill nearly quadruples — from £70,000 to £270,000 — because her pension enters the estate and she has no RNRB or transferable allowances. This is an extra £200,000 in tax.
The Double Taxation Problem
One of the most controversial aspects of the pension IHT change is the risk of double taxation. Here is how it arises:
- IHT on the pension fund value: The full pension pot is included in the taxable estate and potentially taxed at 40%
- Income tax on withdrawal: When the beneficiary draws money from the inherited pension, they pay income tax at their marginal rate (potentially 20%, 40%, or 45%)
In the worst case, a pension pot could face a combined effective tax rate of up to 64% (40% IHT on the fund value, then 40% income tax on the remainder when drawn). The government has indicated it will consider mechanisms to prevent true double taxation, but the details are not yet confirmed.
Currently, inherited pensions are subject to income tax only (if the original owner died after age 75) or are completely tax-free (if they died before 75). The April 2027 change adds IHT on top of the existing income tax treatment.
What Can You Do Before April 2027?
There is no single solution that works for everyone, but here are the main approaches people are considering:
Draw Down Pension and Gift the Income
If you have surplus income from your pension, regular gifts from that income may qualify for the normal expenditure from income exemption. This is immediately outside your estate with no seven-year wait. However, you must be able to demonstrate a regular pattern and that the gifts do not affect your standard of living.
Spend Pension Before Other Assets
Some advisers suggest drawing pension income first and preserving other assets (like ISAs or property) that may be easier to pass on tax-efficiently. This reduces the pension pot that will be included in the estate.
Review Beneficiary Nominations
Ensure your pension beneficiary nominations are up to date. If you are married or in a civil partnership, leaving the pension to your spouse means the spouse exemption applies and no IHT is due on the first death.
Consider Life Insurance in Trust
A whole-of-life policy written in trust could provide your family with funds to pay the IHT bill without having to sell assets or wait for probate.
Interaction with Other Reliefs
The pension inclusion does not change how other IHT reliefs work, but it does change the overall arithmetic:
- Spouse exemption: Still applies. If you leave your pension to your spouse, no IHT is due (but the pension enters their estate instead)
- NRB and RNRB: Still available to offset the estate value, including the pension
- RNRB taper: Adding a pension to the estate could push the total above £2 million, triggering the RNRB taper and reducing available allowances
- Charity exemption: Donations to charity from the estate still reduce the taxable value and may qualify for the reduced 36% IHT rate
For estates that were previously just below £2 million, the addition of a pension pot could push them over the RNRB taper threshold. This means losing up to £175,000 (or £350,000 for a surviving spouse) of additional tax-free allowance on top of the pension being taxed.
How Estate Map Handles the Pension Change
Estate Map's calculator already models the April 2027 pension reform. When you enter your pension details, the calculator:
- Adds the pension value to your taxable estate for deaths after April 2027
- Checks whether the combined estate triggers the RNRB taper
- Calculates the IHT with and without the pension so you can see the difference
- Shows the impact alongside other reliefs (NRB, RNRB, spouse exemption, APR/BPR)
Frequently Asked Questions
Will my pension be subject to inheritance tax from 2027?
From April 2027, unspent defined contribution pension pots will be included in your taxable estate for inheritance tax purposes. If your total estate (including the pension) exceeds the available nil-rate bands and other allowances, the pension value will be subject to IHT at 40%.
Which types of pension are affected by the April 2027 changes?
Defined contribution (DC) pensions are affected, including personal pensions, SIPPs, and workplace DC schemes — whether in accumulation or drawdown. Defined benefit (DB) pensions that pay an ongoing spouse's pension are generally not affected, nor is the state pension.
How do I calculate the inheritance tax on my pension?
Add the value of your unspent DC pension pot to your other estate assets (property, savings, investments). Deduct any available reliefs (nil-rate band, residence nil-rate band, spouse exemption). IHT at 40% applies to the remainder. Use Estate Map's calculator to model this — it already includes the April 2027 pension rules.
Can I reduce the IHT impact of my pension before 2027?
Potential strategies include drawing down more pension income and gifting it (using the normal expenditure from income exemption), spending pension savings before other assets, or reviewing your overall estate plan with a qualified adviser. Each approach has trade-offs and tax implications.
Does the pension IHT change affect defined benefit pensions?
Generally no. Defined benefit (final salary) pensions that pay an ongoing income to a surviving spouse or dependant are typically not included in the taxable estate. However, any lump sum death benefits from a DB scheme may be affected — check the specific scheme rules.
What happens to pension death benefits after April 2027?
Pension death benefits will still be paid to your nominated beneficiaries, but the pension fund value will also be included in your estate for IHT purposes. Beneficiaries who receive the pension may also pay income tax on withdrawals, creating a potential double taxation situation that the government has said it will address.
See How the Pension Change Affects Your Estate
Enter your pension value alongside your other assets. Estate Map's calculator shows you the IHT impact of the April 2027 changes instantly.
Calculate my IHT →This guide provides general information only and does not constitute financial or tax advice. Pension and inheritance tax rules are complex and depend on individual circumstances. Always seek advice from a qualified financial adviser, solicitor, or chartered tax adviser before making estate planning decisions.