Introduction – Why These Changes Matter
If you’ve spent years working, saving, and building a pension, the last thing you expect is for a big slice of it to be swallowed by tax after you’re gone. Yet that’s what many UK families could face from April 2027, when sweeping Pension Inheritance Tax Changes come into force.
For years, pensions have enjoyed a special status. Unlike property, savings, or investments, your pension was usually excluded from inheritance tax (IHT). This meant that, even if you left behind a sizeable pension pot, it didn’t count toward the 40% IHT threshold. Families often relied on this quirk of the system to pass wealth down efficiently. But soon, that door is closing.
The government argues the change is about “fairness,” ensuring pensions aren’t used as a loophole for tax-free wealth transfer. But critics say it punishes savers who played by the rules. Whatever side of the debate you’re on, one thing is clear: the new rules will change how people plan retirement, estate transfers, and even day-to-day spending.
This article takes you through the details: how pensions are taxed today, what’s changing in 2027, the implications for different types of pensions, and – most importantly – what you can do to prepare.
Understanding the Current Pension Inheritance Rules
Right now, pensions are one of the most tax-efficient ways to pass on wealth. If you die with money left in your pension, it usually sits outside your estate for inheritance tax. That means it doesn’t count toward the £325,000 nil-rate band, nor the 40% IHT above that threshold.
Here’s a simple scenario: Suppose you have £500,000 in property, £200,000 in savings, and £300,000 in your pension. Under today’s rules, only the £700,000 in property and savings would count toward inheritance tax. The £300,000 pension would bypass it entirely. That difference alone could save your beneficiaries over £120,000 in IHT.
This setup has made pensions a popular estate planning tool. Many retirees spend down savings and ISAs before touching their pension, knowing the pension can be passed on more tax-efficiently. In fact, some view pensions not just as retirement income but as an intergenerational wealth strategy.
But critics argue this has created unfair advantages. Wealthier households with large pensions can sidestep inheritance tax, while others – whose main wealth is tied up in property – face hefty bills. As pension values grow larger across the UK, the Treasury has set its sights on closing this perceived gap.
Defined Contribution vs. Defined Benefit Pensions
To see who’s most affected by the changes, you need to understand the two main pension types.
Defined Contribution (DC) Pensions
-
You and your employer pay into a pot that grows over time.
-
Whatever remains when you die can usually be passed on.
-
Currently sits outside inheritance tax.
-
If you die before age 75, withdrawals by beneficiaries are free of income tax; after 75, they pay at their marginal rate.
Defined Benefit (DB) Pensions
-
Also known as “final salary” schemes.
-
Promise a guaranteed income for life, based on your earnings and years of service.
-
When you die, a spouse or dependent may continue to receive an income, but you can’t pass on a “pot” in the same way as with DC schemes.
-
These schemes are less flexible for inheritance planning.
Under current rules, both are generally outside of IHT, but the new changes will bite hardest for DC savers, where untouched pension pots are more common.
Pension Inheritance Tax Changes Coming in 2027
From 6 April 2027, unused pensions and death benefits will be included in your estate for inheritance tax purposes. This means they’ll count toward the £325,000 nil-rate band and, above that, may be taxed at 40%.
Let’s revisit our earlier example: £500,000 in property, £200,000 in savings, and £300,000 in pensions. Under the new rules, the full £1 million will be assessed for IHT. That extra £300,000 from the pension could trigger an additional £120,000 tax bill for your loved ones.
This is a seismic shift. Many families who never expected to pay inheritance tax will suddenly find themselves liable. It also risks creating “double taxation”: not only will pensions face inheritance tax, but beneficiaries over 75 will also pay income tax when they withdraw funds – pushing combined effective tax rates up to 67%.
The government defends the changes as a way of levelling the playing field. But financial planners warn it could undermine confidence in pensions, prompting people to pull money out earlier or turn to other strategies such as trusts or annuities.
Death-in-Service Benefits – The Exception
One silver lining in all of this: death-in-service benefits will remain exempt from inheritance tax.
If you’re employed and part of a workplace pension scheme, your family may receive a lump sum if you die while still on the payroll. At present, whether this benefit is taxed depends on the scheme structure. From 2027, all registered death-in-service benefits will be excluded from IHT, regardless of whether the scheme is discretionary.
This provides valuable protection for families facing the sudden loss of a working-age breadwinner. But for most retirees – whose pensions are intended to fund later life – the exemption won’t apply. The vast majority will see pensions move squarely into the inheritance tax net.
Who Will Be Responsible for Paying the Tax?
One of the more complicated aspects of the 2027 changes is who actually pays the tax.
Currently, personal representatives (PRs) — often executors of the will are responsible for handling inheritance tax on non-discretionary pension schemes. They gather information, submit paperwork to HMRC, and ensure tax is paid before assets are distributed.
From April 2027, this responsibility will shift in large part to pension scheme administrators (PSAs). They’ll need to report unused pension values, calculate IHT liabilities, and pay HMRC directly before releasing funds to beneficiaries.
This will require close cooperation between executors and pension providers. Executors will notify administrators of the death, administrators will confirm pension values, and together they’ll determine how much of the nil-rate band applies. Only once the tax is paid will the funds be distributed.
While this may reduce some burden on families, it also adds complexity. Pension providers will need new systems, and families could face delays in accessing money — particularly if there are disputes or multiple pensions to account for.
The Potential Tax Burden for Families
The average additional bill from the changes is expected to be around £34,000, but for many, it could be far higher.
-
A family inheriting a £1 million estate including a £400,000 pension could face an extra £160,000 tax bill.
-
If the pension is left untouched until after age 75, beneficiaries may then pay income tax on top of the IHT when they draw it — potentially losing two-thirds of the inheritance to taxes.
-
Families relying on pensions to provide income after a death could find themselves with far less than expected.
This risk of “double taxation” is one of the most controversial aspects of the reform. It could discourage people from saving into pensions in the first place — precisely the opposite of what a government facing an ageing population would want.
Estate Planning Implications – What You Need to Consider
These changes will force a rethink of estate planning strategies. If you’ve always assumed your pension was safe from inheritance tax, it’s time to revisit your plan.
Some key considerations:
-
Order of Drawdown – You may want to start using pension funds earlier in retirement instead of leaving them untouched.
-
Trusts and Gifting – Some may turn to trusts or lifetime gifting to move wealth outside of their estate.
-
Annuities – Converting pension pots into annuities reduces the estate value and provides guaranteed income, and interest in annuities is already rising.
-
Insurance – Wealthier households may use life insurance to cover future IHT bills.
-
Professional Advice – With the rules changing, financial advice is more important than ever.
Estate planning was already a headache. From 2027, it gets a lot more complex.
Conclusion
The Pension Inheritance Tax Changes of 2027 represent one of the most significant shifts in pension and estate planning for decades. By bringing pensions into the inheritance tax net, the government is set to raise billions — but at the expense of families who saved diligently for retirement.
For many, the changes could mean tax bills in the tens or even hundreds of thousands, alongside a new layer of administrative complexity. The “double taxation” risk makes planning more urgent than ever.
If you have a pension, now is the time to act. Review your estate plan, talk to an advisor, and think carefully about how you draw down your retirement funds. Waiting until 2027 could leave your loved ones with an unexpected and hefty bill.
FAQs
1. What are the Pension Inheritance Tax Changes in 2027?
From April 2027, unused pension pots will be included in your estate for inheritance tax, meaning they could be taxed at up to 40% on top of income tax for beneficiaries.
2. Do the changes apply to all pensions?
Yes, they apply to both defined contribution and defined benefit schemes. However, death-in-service benefits remain exempt.
3. Who pays the inheritance tax on pensions after 2027?
Pension scheme administrators (PSAs) will handle reporting and paying IHT to HMRC before releasing funds to beneficiaries.
4. Could my family face double taxation on pensions?
Yes. If you die after 75, beneficiaries could pay IHT and then income tax when they withdraw funds – pushing total tax rates to around 67%.
5. How can I reduce the impact of these changes?
Consider drawing pensions earlier, using annuities, gifting wealth, or setting up trusts. Professional advice is essential for planning ahead.