Pensions and Inheritance Tax from April 2027: The Full Picture
Currently, defined contribution pension pots sit outside the estate for inheritance tax purposes. From April 2027, that changes. This is one of the most significant IHT changes in decades, affecting millions of people with SIPPs, personal pensions, and workplace defined contribution pots. With a year to plan, here is what the change means and what to consider.
Pension IHT Changes at a Glance
How It Works Now (Pre-April 2027)
Under the current rules, defined contribution pension pots are passed to beneficiaries entirely outside the estate for IHT purposes. Whether the pension is in accumulation or drawdown, its value is not counted when calculating inheritance tax.
This means a person with a £500,000 estate and a £400,000 SIPP is currently assessed for IHT only on the £500,000. The pension passes separately to nominated beneficiaries. The only tax consideration is income tax: if the pension holder dies before age 75, beneficiaries can draw the pension tax-free. If they die at 75 or over, beneficiaries pay income tax at their marginal rate on withdrawals.
Because of this favourable treatment, pensions have become one of the most popular IHT planning vehicles. Many financial advisers recommend spending other assets first and preserving the pension pot specifically because it sits outside the estate.
What Changes from April 2027
From 6 April 2027, unused defined contribution pension funds — including uncrystallised pots and funds in drawdown — will be included in the deceased's estate for inheritance tax purposes. The key changes are:
- The value of unspent DC pension pots is added to the taxable estate
- IHT is calculated at 40% on the total estate (including the pension) above available allowances
- Pension trustees will be responsible for reporting and paying the IHT attributable to pension assets
- Income tax treatment on withdrawals by beneficiaries may remain separately taxable — creating a double taxation risk
This is a fundamental shift. For the first time, the value of your pension pot will directly increase your estate's IHT liability. The strategy of “spend everything else, keep the pension” no longer works as an IHT shelter from April 2027.
Who Is Most Affected?
The pension change does not affect everyone equally. Those most exposed include:
- People who have deliberately preserved pensions for IHT purposes — if you have been drawing from ISAs and savings while leaving your SIPP untouched, your pension pot is likely larger than average and now represents a significant addition to your taxable estate
- Wealthier retirees with large SIPP balances — those with pensions above £200,000-£300,000 alongside other assets that already exceed the nil-rate band
- Estates already above the NRB/RNRB thresholds — if your estate (excluding the pension) is already above £500,000, adding the pension pot pushes more value into the 40% IHT bracket
Combined with the APR/BPR reform that took effect today, the pension change from April 2027 represents a significant widening of the IHT net. Families with agricultural or business assets and large pension pots face compounding exposure across both reforms.
Worked Example: How Much More IHT?
Margaret, a widow, dies in May 2027. She has a main home worth £800,000 (mortgage-free), investments worth £200,000, and a SIPP worth £400,000. She qualifies for the transferred nil-rate band from her late husband and leaves her home to her children (qualifying for RNRB).
| Component | Pre-April 2027 | Post-April 2027 |
|---|---|---|
| Main home | £800,000 | £800,000 |
| Investments | £200,000 | £200,000 |
| Pension pot | Not included | £400,000 |
| Total taxable estate | £1,000,000 | £1,400,000 |
| Less: NRB (£325k + £325k transferred) | −£650,000 | −£650,000 |
| Less: RNRB (£175k + £175k transferred) | −£350,000 | −£350,000 |
| Taxable amount | £0 | £400,000 |
| IHT at 40% | £0 | £160,000 |
The pension adds £160,000 of IHT that would not have existed under the current rules. Margaret's estate goes from paying nothing to owing £160,000 — entirely because of the pension inclusion.
The Double Taxation Risk
One of the most concerning aspects of the pension change is the potential for double taxation. When a pension holder dies at age 75 or over:
- IHT at 40% is charged on the pension value as part of the estate
- Income tax is also payable by beneficiaries when they withdraw from the inherited pension (at their marginal rate — typically 20% or 40%)
In the worst case, the combined effective rate could exceed 60%. For example, a pension pot in the 40% IHT bracket that is then drawn down by a higher-rate taxpayer faces 40% IHT + 40% income tax on the remainder = an effective rate of 64%. The government has indicated it will address this double taxation, but no mechanism has been confirmed.
Until the government clarifies the interaction between IHT and income tax on inherited pensions, this remains one of the most significant planning uncertainties.
Planning Considerations
With a year before the change takes effect, there are several strategies worth discussing with a qualified adviser. These are informational only — not advice:
- Draw down more from the pension while alive. Using pension income to fund living costs (instead of depleting other assets) reduces the pension pot that enters the estate. The trade-off is income tax on the withdrawals.
- Gift from pension drawdown. Pension withdrawals can be gifted using the annual exemption (£3,000/year), the seven-year rule, or the normal expenditure from income exemption. This removes wealth from the estate over time.
- Review the order of asset drawdown. The traditional advice to “spend the pension last” may no longer be optimal. Spending pension income first and preserving ISAs or other assets could reduce the overall IHT bill.
- Consider charitable legacies from the pension. Pension assets left to charity remain exempt from IHT. If charitable giving is part of your plan, the pension may be the most tax-efficient source.
- Review beneficiary nomination forms. While nominations no longer determine the IHT position, they remain important for ensuring pension trustees distribute funds according to your wishes without delay.
What Is NOT Changing
Not everything is affected by the April 2027 reform. The following remain unchanged:
- Defined benefit (final salary) pensions — death benefits that pay an ongoing income to a surviving spouse or dependant are generally not included in the taxable estate. Lump sum death benefits may be treated differently.
- State pension — not affected. State pension entitlement ceases on death and does not form part of the estate.
- Spousal exemption — pension assets passing to a surviving spouse or civil partner remain exempt from IHT, consistent with the general spousal exemption.
- Pension freedoms — the ability to access DC pensions flexibly from age 55 (rising to 57 from 2028) is not affected.
Timeline: What Happens When
| Date | Change |
|---|---|
| 6 April 2026 (today) | APR/BPR capped at £2.5m; AIM shares BPR drops to 50% |
| 6 April 2027 | Unused DC pension pots included in taxable estate for IHT |
| 2028 | Minimum pension access age rises from 55 to 57 |
Key dates for estate planning from 2026 onwards
Frequently Asked Questions
Will my pension be subject to inheritance tax from April 2027?
If you have a defined contribution pension (including SIPPs and workplace DC schemes) with unused funds at death, yes. From April 2027, the value of those unspent pension pots will be included in your taxable estate for IHT purposes.
Does the spousal exemption apply to pensions from 2027?
Yes. Pension assets passing to a surviving spouse or civil partner remain exempt from inheritance tax, just as other spousal transfers are. The IHT charge applies only when pension funds pass to non-spouse beneficiaries and the total estate exceeds available allowances.
What about defined benefit pensions?
Defined benefit (final salary) pensions that pay an ongoing income to a surviving spouse or dependant are generally not included in the taxable estate. However, any lump sum death benefits from a DB scheme may be affected differently — check the specific scheme rules and seek professional advice.
Model the Pension Change on Your Estate
Estate Map's calculator includes the April 2027 pension rules. Add your pension pot alongside your other assets to see how the change affects your total IHT liability.
Calculate my IHT →This article is for educational purposes only and does not constitute financial advice. Pension and inheritance tax rules are complex and depend on individual circumstances. Always consult a qualified financial adviser or chartered tax adviser before making pension or estate planning decisions.