If you’re someone who has built up a significant pension pot over the course of your working life, you have probably thought carefully about who benefits from it when you are no longer here. For many people, pensions have been one of the most effective ways to pass wealth to the next generation, because unused funds have typically sat outside of your estate for inheritance tax purposes.
From April 2027, that changes.
The government announced in the Autumn 2024 Budget that most unused pension funds and death benefits would be brought into the scope of inheritance tax. That legislation received Royal Assent on 18 March 2026 as part of the Finance Act 2026. This is now law.
That gives you roughly twelve months. Not to panic, but to plan.
If your estate plan was built around the assumption that your pension sits outside of IHT, now is the time to revisit it. Not in a rush, but with purpose.
Key Takeaways
- From 6 April 2027, most unused pension funds and pension death benefits will be included in your estate for inheritance tax purposes. This is now confirmed in law under the Finance Act 2026.
- Pensions left to a surviving spouse or civil partner will still benefit from the spousal exemption. Pensions left to children or other beneficiaries will face an IHT charge.
- Death in service lump sum benefits will be excluded from the changes, including for non-active members.
- Pension beneficiaries could face both income tax and inheritance tax on the same funds, potentially creating an effective combined tax rate of 64% or higher in some circumstances.
- Reviewing your pension nomination form and expression of wishes is one of the most practical steps you can take now.
- It is important to take financial advice before making any changes to your pension or estate plan.
What is changing about inheritance tax on pensions?
Under the current rules, most unused pension funds do not count towards the value of your estate when you die. This is because the majority of UK pension schemes are set up as discretionary trusts, where the scheme administrator has discretion over who receives the benefits. That structure has kept pensions outside of the IHT net for decades.
The Finance Act 2026 changes that. From 6 April 2027, the value of your undrawn pension will be added to the rest of your estate and could be taxed at 40% above the nil-rate band.
There are important exemptions. Pension benefits passing to a surviving spouse or civil partner will remain exempt from IHT, consistent with the existing spousal exemption. Benefits passing to a registered charity will also be exempt. And death in service lump sum benefits, such as a multiple of salary paid by your employer’s pension scheme, will be excluded entirely. That exemption has been widened during the Bill’s passage through parliament to include non-active members, not just active members as originally proposed.
But for anyone who has nominated their children, grandchildren, or other non-spouse beneficiaries, the picture changes considerably.
The government’s consultation response, published on GOV.UK in July 2025, sets out how the new rules will work in practice. Personal representatives, not pension scheme administrators, will be responsible for reporting and paying any IHT due on the pension element of the estate. They will be able to direct pension scheme administrators to withhold up to 50% of the taxable pension benefits for up to 15 months after the date of death, providing some flexibility where the wider estate does not hold enough liquid funds to cover the IHT bill.
Are pensions subject to inheritance tax right now?
This is a question our independent financial advisers hear regularly, and the answer is changing.
Most defined contribution pension pots sit outside of your estate for IHT purposes. If you die before age 75, your nominated beneficiaries can usually receive your pension free of income tax too. After 75, beneficiaries pay income tax at their own marginal rate on any withdrawals, but the funds themselves are not counted as part of your taxable estate.
That is why many people, often on the advice of their independent financial adviser, have treated pensions as a last resort for spending. The logic has been straightforward: draw from ISAs, savings, and other taxable assets first, and leave the pension to pass on as efficiently as possible.
From April 2027, that logic no longer holds. Pensions will count towards your estate, and the inheritance tax planning landscape for pension wealth shifts fundamentally.
Could pension beneficiaries face double tax?
This is perhaps the most concerning aspect of the pensions inheritance tax changes for families.
Under the new rules, inherited pension funds could be subject to both inheritance tax and income tax. Inheritance tax would be calculated on the value of the pension as part of the estate. Then, when beneficiaries draw down the funds, they would also pay income tax at their own marginal rate.
For a higher-rate or additional-rate taxpayer inheriting a pension, the combined effective tax rate could reach 64% or higher. That is not a figure designed to alarm. It is the arithmetic of a 40% IHT charge applied first, followed by income tax on the remaining balance when it is withdrawn.
For example, if a £500,000 pension were left to a beneficiary and subject to inheritance tax, an initial charge of 40% would reduce the fund to £300,000. If that beneficiary then withdrew the remaining pension and paid income tax at 40%, a further £120,000 could be due in tax, leaving £180,000 net of tax from the original £500,000.
This double tax on pensions is something the government acknowledged during the consultation process but did not address with specific relief in the final legislation. It remains one of the areas the industry is pressing for further clarity on ahead of April 2027.
For families where a pension makes up a significant portion of the estate, this is a conversation worth having sooner rather than later. Understanding the potential combined tax impact is the first step towards planning around it.
Who do these pension inheritance tax changes affect most?
Not everyone will be affected equally. For some people, the practical impact could be minimal. For others, it could change the entire shape of their estate plan.
You are most likely to be affected if your pension forms a large part of your overall wealth and you had planned to leave it to your children or other non-spouse beneficiaries. If your estate, including your pension, is likely to exceed the available nil-rate bands (currently £325,000, plus the residence nil-rate band of up to £175,000 where applicable), the pension element could now attract a 40% IHT charge that it would not have done under the current rules.
People who have deliberately followed a strategy of spending other assets first and preserving their pension may want to rethink that approach. The rationale for doing so was based on the pension sitting outside of IHT. If that advantage is removed, the drawdown order across your different pots may need to be reconsidered.
Business owners who hold substantial pension wealth alongside business assets should also consider how the changes interact with their wider succession planning, particularly if they have been relying on a combination of pension exemptions and Business Relief to manage IHT exposure.
For clients in the Preparation or Early Retirement stages of their financial journey, these changes are especially relevant. This is often the point where estate planning becomes a priority, and where the interplay between pensions, property, investments, and gifting needs to be properly joined up.
What should you be doing now about pension inheritance tax?
The good news is that you have time. April 2027 is twelve months away, and that is enough time to make considered decisions rather than rushed ones. Here are the practical steps worth thinking about.
Review your pension nomination form and expression of wishes
This is the single most important practical step. Your expression of wishes pension document tells your pension scheme who you would like to receive your benefits when you die. Under the current rules, many people have nominated their children. Under the new rules, it may be more tax-efficient to nominate your spouse or civil partner, who would benefit from the spousal IHT exemption.
It is worth checking who is currently nominated, whether that still makes sense given the new rules, and whether your pension nomination form needs updating. This is something your independent financial adviser can help you work through.
Reconsider your drawdown strategy
If you have been leaving your pension untouched to pass it on, now is the time to ask whether that still makes sense. Depending on your circumstances, it could be more efficient to draw from your pension during your lifetime and use those funds for gifting, spending, or investing in other structures that sit outside of IHT.
That does not mean emptying your pension. It means looking at the bigger picture and making sure each pot of money is working as hard as it can for you and your family. Cash flow modelling can be particularly helpful here, because it lets you see the long-term impact of different drawdown strategies.
Look at your estate plan as a whole
Pensions do not sit in isolation. They interact with your property, your investments, your ISAs, any trusts you have in place, and your gifting history. The pension inheritance tax changes mean that your estate plan needs to be reviewed as a connected whole, not as a collection of separate parts.
If you have not reviewed your estate plan recently, or if it was designed around the assumption that pensions would remain outside of IHT, this is the prompt to do so.
Take financial advice before making any changes
The Finance Act 2026 is now law, and the changes to inheritance tax on pensions will take effect from 6 April 2027. HMRC is continuing to develop guidance and process maps ahead of implementation, and there may be further operational detail to come.
But the rules themselves are settled. The sensible approach is to understand how these changes affect your specific circumstances, discuss it with your independent financial adviser, and put a plan in place while you still have time to act thoughtfully rather than reactively.
Talk to an Independent Financial Adviser in Dorset About Pension Inheritance Tax Planning
The changes to inheritance tax on pensions are significant, and for many families they will require a fresh conversation about how wealth is structured and passed on. It is the kind of change that can feel unsettling, but with the right planning, it does not need to be.
Baggette + Co. is a Chartered independent financial adviser based in Poole, working with clients across Dorset, Hampshire and further afield. We help people at every stage of their financial journey understand how changes like these affect their plans, and we work alongside solicitors and accountants to make sure everything is joined up.
Whether you need to review your pension nominations, rethink your drawdown approach, or revisit your estate plan in light of the pension inheritance tax changes, we can help you see the full picture and make decisions with confidence. That is what peace of mind looks like.
To start a conversation, contact Harry Shivas on 01202 676 983 or email [email protected].
Frequently Asked Questions
Under the current rules, most unused pension funds sit outside of your estate for inheritance tax purposes. However, the Finance Act 2026 confirmed that from 6 April 2027, most unused pension funds and death benefits will be brought into scope of IHT. This means pensions will count towards your taxable estate for the first time. Benefits passing to a surviving spouse or civil partner will remain exempt.
Pension funds included in your estate will be subject to IHT at the standard rate of 40% on the value above the available nil-rate bands. The nil-rate band is currently £325,000, with an additional residence nil-rate band of up to £175,000 where applicable. Pension beneficiaries could also face income tax on any withdrawals, meaning the combined effective tax rate in some circumstances could be 64% or higher.
Not necessarily. Withdrawing pension funds creates an immediate income tax liability, and the money then sits within your estate unless you gift it or place it in another structure. Whether it makes sense to adjust your drawdown strategy depends on your overall financial position, your income needs, and the rest of your estate. An independent financial adviser can help you model different scenarios and understand the trade-offs involved.
An expression of wishes, sometimes called a pension nomination form, is a document that tells your pension scheme who you would like to receive your pension benefits when you die. Although the scheme retains discretion, nominations are usually followed. With the inheritance tax changes confirmed in the Finance Act 2026, reviewing your expression of wishes pension document is one of the most important practical steps you can take. It may now be more tax-efficient to nominate your spouse or civil partner rather than your children.
Baggette + Co. is based in Poole and works with clients across Bournemouth, Christchurch, Wimborne, and the wider Dorset and Hampshire area. Our independent financial advisers can help you review your pension arrangements and estate plan in light of the pension inheritance tax 2027 changes. Call us on 01202 676 983 or email [email protected].
DISCLAIMER:
Baggette + Co. Wealth Management is authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate tax planning, cashflow planning, estate planning and trusts. The above information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon as, financial advice. Capital is at risk. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement. Tax rules may change, and the value of tax reliefs depends on your individual circumstances.