For years, a pension was one of the few things you could pass on free of inheritance tax. That ends on 6 April 2027, when IHT on pensions arrives for most unused pension pots.
If your pension is a big part of what you would leave behind, your family's tax bill could rise by tens of thousands of pounds. This news guide sets out what the rules now say, who pays, and what to check this year.
Everything here comes from HM Treasury's policy paper on unused pension funds, updated on 26 November 2025.
What is changing with IHT on pensions?
From 6 April 2027, most unused pension funds and pension death benefits will be counted as part of your estate when you die. They will share the same £325,000 nil-rate band and residence nil-rate band as your home and savings, and anything above is taxed at 40%.
Today, most defined contribution pensions sit outside the estate, because schemes pay death benefits at their discretion.
Our rule page on pensions and inheritance tax shows both versions of the rule, with the date the switch happens.
What stays exempt from IHT on pensions?
The new inheritance tax rules keep several important exemptions:
- Your spouse or civil partner. Pension death benefits passing to them stay exempt, just like other assets.
- Registered charities. Also still exempt.
- Death-in-service benefits paid from a registered pension scheme are excluded.
- Dependants' scheme pensions from a defined benefit or collective money purchase arrangement are excluded.
So the change mainly hits pensions passed to children, grandchildren and others.
Who pays IHT on pensions from 2027?
Your personal representatives, usually your executors. The government had first proposed making pension scheme administrators liable, but dropped that idea after consultation. Executors must now report and pay any tax on the pension, as they do for the rest of the estate.
To help them, executors can tell scheme administrators to hold back money. Beneficiaries can then only take 50% of death benefits that may face tax, for up to 15 months after the death, while the bill is worked out.
Executors are also protected if a forgotten pension turns up after HMRC has cleared the estate. They are discharged from liability for pensions discovered after they have received clearance.
How many estates will IHT on pensions affect?
HM Treasury's own figures for 2027/28:
| Measure | Estimate |
|---|---|
| Estates with pension wealth that could pass on | around 213,000 |
| Estates that will owe inheritance tax for the first time | 10,500 |
| Estates that will pay more inheritance tax | 38,500 |
| Average rise in the bill where pensions are included | about £34,000 |
Source: HM Treasury and HMRC policy paper, 26 November 2025.
Inheritance tax is already raising more each year. HMRC's receipts bulletin shows £3.8 billion collected between April and August 2026, £0.1 billion more than a year earlier, and that is before pensions are added.
A worked example: before and after April 2027
This is an illustrative example, not a real person.
Rob is divorced with two adult children. He leaves them a house worth £550,000, savings of £150,000 and a defined contribution pension of £300,000 that he never touched.
| Dies before 6 April 2027 | Dies on or after 6 April 2027 | |
|---|---|---|
| Home and savings | £700,000 | £700,000 |
| Unused pension | Outside estate | £300,000 |
| Estate for inheritance tax | £700,000 | £1,000,000 |
| Nil-rate band plus residence band | £500,000 | £500,000 |
| Taxable | £200,000 | £500,000 |
| Inheritance tax at 40% | £80,000 | £200,000 |
Table: Plenence workings using the 2026/27 thresholds, which are frozen until April 2031. Assumes the home passes to Rob's children and no gifts in the last 7 years.
That is £120,000 more tax on the same assets. And if Rob was 75 or over when he died, his children would also pay income tax on what they draw from the pension, under the existing rules for inherited pensions.
What executors will need from 2027
Because executors now carry the bill, they need pension details much earlier than before. Make their job easier by keeping, in one place:
- the name of every pension scheme and your policy numbers
- a recent statement for each, with its value
- a copy of each expression of wish form
- any life cover or death-in-service benefits through work
A forgotten pension can delay the estate for months. A one-page list saves your family weeks of letters, and makes IHT on pensions far easier to work out.
What this means for spending your pension
For decades, the standard advice was to spend ISAs and savings first and leave the pension untouched, because it passed on tax-free. From 2027, that logic weakens for many families.
The order you draw your money in, the choice between an annuity and drawdown, and whether to make gifts during your life all deserve a fresh look. Our comparison of annuity vs drawdown covers how each one is treated on death.
"Regularly reviewing wills and estate plans, and seeking professional financial advice, is no longer optional."
Amit Joshi, Managing Director of Wealth, Mattioli Woods, September 2026
Mistakes to avoid before April 2027
- Assuming the old rules still apply. Plans built on "pensions are outside the estate" need re-running.
- Not updating your expression of wish. It still decides who the scheme pays. Check it names who you want.
- Rushing to empty the pension. Large withdrawals are taxed as income, often at 40% or more. Swapping inheritance tax for income tax is not always a win.
- Forgetting the £2 million taper. Adding a pension can push an estate over £2 million and shrink the residence nil-rate band.
- Buying products in a hurry. Life insurance for inheritance tax, written in trust, can help some families, but it needs proper advice.
How to avoid inheritance tax surprises from 2027
You cannot avoid the rule, but you can know your number. List your pensions, home, savings and gifts. Then run the estate both ways, before and after April 2027.
Our inheritance tax calculator does exactly that when you pick a date of death on or after 6 April 2027, and shows the rules it used. If you are married, our guide to inheritance tax when the second parent dies shows why the second estate usually takes the hit. And if you are making gifts, read up on the 7 year rule.
Plenence's estate section includes unused pensions from the April 2027 date and flags the change when it affects your estimate. It is for education and modelling, not advice; for wills and trusts, speak to a solicitor or regulated adviser.