Pensions and Inheritance Tax from April 2027: What Changes

By Executr Ltd.. Rules current as at 9 October 2026. Applies UK-wide.

For a death today, unused pension funds generally sit outside the estate for Inheritance Tax. From 6 April 2027, they come inside it.

This is the largest single change to Inheritance Tax in a generation, and it will pull a substantial number of estates into charge for the first time. If your retirement plan assumed the pension would pass to your children tax free, that assumption has an expiry date.

The calculator has a toggle for this. Enter your pension value and switch to the April 2027 basis to see both positions side by side.

What is changing

Under the current rules, a defined contribution pension pot you haven't spent is normally outside your estate. It passes under the scheme's discretionary powers to whoever you nominated, and no Inheritance Tax arises. The only tax question is Income Tax for the beneficiary, and that depends on your age at death.

From 6 April 2027, unused pension funds and death benefits form part of the estate and are subject to Inheritance Tax alongside everything else. The normal allowances, the spouse exemption and the charitable exemption all still apply — the pension simply stops being a separate, protected pot.

Two consequences follow immediately:

• A pension left to children or grandchildren can be taxed at 40%, where previously it was taxed at 0%.
• The pension counts towards the £2,000,000 taper threshold, so adding a pension to the estate can also destroy the residence nil-rate band — a second, hidden cost.

The arithmetic — a worked comparison

Someone with a £400,000 home left to their children, £100,000 of savings, and a £500,000 untouched SIPP. Single, no transferred allowances.

Death today

The children also receive the £500,000 pension, free of Inheritance Tax. Total passing on: £1,000,000.

The same death on or after 6 April 2027

Same assets, same beneficiaries, same will. £200,000 of tax that did not exist before, purely because of the date of death.

And that is the benign version. Where the estate is pushed above £2,000,000 by the pension, the residence allowance tapers away on top.

The double tax trap over 75

The Inheritance Tax change sits on top of an Income Tax rule that already exists, and the interaction is severe.

Take a £100,000 pension left to a higher-rate taxpayer where the member died aged 78, and assume the estate is above the allowances:

An effective rate of 64%. For a beneficiary who is an additional-rate taxpayer, or whose own income is pushed over £100,000 by the withdrawal, it can be worse.

This combination is the strongest argument for looking at the shape of your retirement income before 2027, particularly if you are over 75, have a large unused fund, and expect to leave it to working-age children.

What stays outside the estate

Not everything pension-related is caught. On the rules as announced:

• Anything passing to a spouse or civil partner — the spouse exemption is unchanged, so a pension to a widow or widower remains exempt.
• Anything passing to charity.
• Death in service benefits from a registered pension scheme are expected to remain outside the estate.
• Life policies written in trust have never been in the estate and are not affected.
• Dependants' scheme pensions and annuity arrangements that die with the member — there is no fund left to tax.

⚠ Verify before relying on this. The 2027 regime is legislated but new, and the detail of which death benefits are caught, how the reporting works and how the liability is apportioned between the scheme and the estate all matter. Check against current HMRC guidance and take advice before acting.

Who is affected most

Hit hardest:

• Anyone with a large unused defined contribution pot and no surviving spouse
• People over 75 leaving pensions to higher-rate taxpayer children
• Estates sitting just under £2,000,000 where adding the pension triggers the taper
• Anyone who deliberately spent other assets first to preserve the pension as a tax-free legacy — a strategy that was sound advice for a decade and is now inverted

Barely affected:

• Married couples where the pension passes to the survivor
• Estates comfortably within the allowances even with the pension included
• People with mainly defined benefit pensions that provide a spouse's pension rather than a transferable fund
• Anyone who will have spent their pension in retirement, which is most people

What to think about now

This page is information, not advice, and pension decisions are precisely where regulated advice earns its fee. But these are the levers people are discussing:

1. Spend the pension first. The old logic — preserve the pension, spend the ISAs — reverses. From 2027 both sit in the estate, so the Income Tax position and your actual spending needs drive the order, not Inheritance Tax.
2. Use the normal expenditure out of income exemption. Regular gifts from surplus pension income are immediately exempt, with no seven-year wait. This becomes considerably more attractive. See the 7-year rule.
3. Check your expression of wishes. A pension to a spouse is exempt; to children it is not. The nomination form drives this, not your will.
4. Mind the £2,000,000 line. Below it, the residence allowance survives. Each £1 of estate reduced in the taper zone saves 60p.
5. Consider life cover in trust to meet the eventual bill, rather than restructuring the pension itself.
6. Don't act on headlines. Withdrawing a large sum to "get it out of the pension" triggers Income Tax immediately, often at 40% or 45%, and the cash you withdraw is in your estate anyway. Many people will be worse off for acting than for doing nothing.

The practical problem for executors

There is an administrative wrinkle worth knowing about. The pension scheme holds the money; the executors file the account and are responsible for the estate's tax. Getting those two to line up — valuing the fund at the date of death, agreeing the apportionment of tax between the scheme and the estate, and paying HMRC by the six-month deadline — adds real work to an already difficult job.

Expect pension administrators and executors to be learning this together through 2027 and 2028. Keeping a clear record of every pension, its provider, its value and its nominated beneficiaries is a genuine kindness to whoever has to sort it out. That record-keeping problem is a large part of why we're building Executr.

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