Pensions and inheritance tax: what the changes mean for you
From April 2027, new rules will change the way pension savings are taxed when someone dies. Find out who will be affected and how to reduce inheritance tax on your pension.
New rules coming into effect in 2027 will change how pension savings are taxed when someone dies.
While the final legislation is still to be published, it is expected that pensions will no longer be exempt from inheritance tax (IHT) from 6 April 2027. This means that if you still have money in your pension when you die, it might be subject to IHT at 40%.
In this article, we explain the current rules, the upcoming changes, who will be impacted and some ways to mitigate the effects of IHT on your pension.
How are pensions taxed on death currently?
Currently, pensions fall outside of your estate1 for IHT purposes, which means your loved ones can receive your pension money free of the 40% IHT that applies to other assets in your estate.
However, this doesn’t mean the people inheriting your pension pot (your ‘beneficiaries’) won’t pay any tax at all:
If you die before age 75
Your beneficiaries can usually draw income from the pension without paying tax. Lump sum payments are tax free up to your ‘lump sum and death benefit allowance’ (LSDBA), which is £1,073,1002. Any lump sum payments over this limit are taxed at the beneficiary’s normal income tax rate.
If you die after age 75
Your beneficiaries will pay income tax at their normal rate, whether the money is taken as lump sums or through income drawdown.
How are the rules expected to change?
From 6 April 2027, if you have money in a defined contribution (DC) pension when you die, it will be added to the value of your estate and IHT might need to be paid (unless you leave the money to your spouse/civil partner). A DC pension is a type of pension where you save money over time to use when you retire, such as self-invested personal pensions (SIPPs) and some workplace pensions.
Some annuities (a type of insurance product which you buy with your pension) will also be included. Annuities payable to a dependant or nominee will be subject to IHT, but joint life annuities, which pay income to your spouse or civil partner after you die, will not be affected.
Defined benefit (DB) pensions, which pay a guaranteed income and are funded by employers, will not be affected and will remain exempt from IHT.
Who will be affected by the changes?
The changes will primarily impact those with very large pension pots and estates. Most people spend their pension money in retirement, which means they won’t have much, if any, pension savings left to pass on. What’s more, if you’re married or in a civil partnership and leave your pension to your partner, there will be no IHT to pay on first death.
The government estimates that of around 213,000 estates with inheritable pension wealth in 2027-28, around 50,000 will either be brought into the scope of IHT for the first time or will pay more than they would have before the changes3.
It’s also worth remembering that the primary purpose of pensions is to help fund your retirement. It’s only since 2015, when the rules around pension death benefits last changed, that pensions have been used as an estate planning tool by the wealthy.
For most people, the inheritance tax-free thresholds will continue to protect their assets from IHT:
- You have a ‘nil-rate band’ of £325,000, which is the amount you can pass on to anyone free from IHT when you die.
- If you leave your home to your children or grandchildren, you’ll also qualify for the residence nil-rate band, which is currently £175,0004.
- Taken together, the two allowances mean your overall tax-free threshold could be as much as £500,000.
- If you’re married or in a civil partnership, any unused part of your nil-rate bands can be transferred to your partner when you die, meaning a couple could potentially pass on up to £1 million free from IHT.
How can I reduce the impact of inheritance tax?
There are ways to minimise the impact of IHT on your pension savings. For example, withdrawing money from your pension and gifting it to loved ones may reduce the value of your estate and, in turn, the amount of IHT due. However, it’s really important not to give away too much too soon. Running out of money during your retirement could be more detrimental than your beneficiaries paying some tax.
You can learn more about lifetime gifts, and some of the other ways to pass on wealth tax efficiently, in our earlier article on how to manage inheritance tax.
However, while gifting may be worthwhile for some families, acting too early on legislation which hasn’t yet been finalised can be risky. Taking money out of your pension without a specific need could mean losing valuable tax-free growth on your savings, which could harm your retirement wealth in the long run. It could also result in a large income tax bill, which may cancel out any potential IHT saving. It’s always a good idea to seek advice before making big decisions about your pension and inheritance tax.
1 Your estate includes your money, investments, property and physical possessions.
2 Your lump sum and death benefit allowance might be higher if you hold a protected allowance. You can read more about lump sum allowances on HMRC’s website. If you’ve already taken tax-free cash from your pension, your LSDBA will be reduced.
3 Inheritance tax on unused pension funds and death benefits. HMRC. 21 July 2025.
4 For those with very large estates, the residence nil-rate band is tapered. It reduces by £1 for every £2 that your estate exceeds £2 million.
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