For most people, unused pensions will now count for inheritance tax. For deaths on or after 6 April 2027, unused pension funds and most pension death benefits are added to the estate and can be taxed at 40%. Anything passing to a spouse or civil partner stays exempt. Where death is after age 75, the person inheriting may also pay income tax on what they draw, so the combined cost can exceed 60%. The rules are now law in the Finance Act 2026, which leaves about six months to review wills, nominations and the order in which you spend your savings.
What changes, and when
Until now, most defined contribution pensions sat outside the estate because the scheme decided who received the money. From 6 April 2027 that no longer matters. The value of a member's pension that can be paid out on death is treated as if they owned it outright immediately before death, alongside their home, savings and investments.
Some benefits are left out of the new rules:
- Death-in-service benefits from a registered pension scheme, payable only because the member was still working for the employer at the time of death.
- Dependants' scheme pensions, such as a widow's pension under a final salary scheme.
- Dependants' or nominees' annuities bought together with the member's own lifetime annuity, for example a joint-life annuity.
The usual exemptions still work. Pension benefits paid to a surviving spouse or civil partner, or to a charity, are exempt. The spouse exemption only defers the question, though: what the survivor does not spend will be counted in their own estate on their death.
Who reports and pays the tax
An early proposal for pension schemes to pay the tax was dropped. Under the final law, the personal representatives (executors or administrators) are responsible for reporting the pension alongside the rest of the estate and for paying the tax. The beneficiaries who receive the pension can also be liable.
Because executors often have little cash, the Act gives them two tools:
- A withholding notice. Executors can ask the scheme to hold back half of each beneficiary's share until the tax is settled, for up to 15 months after the end of the month of death.
- A payment notice. Executors or beneficiaries can direct the scheme to pay the tax straight to HMRC, where the amount is at least £1,000. The scheme then has 35 days to pay.
Executors who have obtained HMRC clearance are not liable for a pension found later, unless they were careless in missing it.
The over-75 problem: tax on tax
If death occurs before age 75, beneficiaries can usually take inherited pension money free of income tax, subject to the lump sum and death benefit allowance. If death occurs at 75 or over, what they withdraw is taxed as their income at their own marginal rate.
The Act does give some relief: the income tax is charged on the pension after the inheritance tax attributable to it has been deducted, not on the gross figure. Even so, the combined cost is high. Take £100,000 of pension left to a son who pays the 45% additional rate, where the rest of the estate already uses up the tax-free thresholds:
| Step | Amount |
|---|---|
| Pension fund | £100,000 |
| Inheritance tax at 40% | £40,000 |
| Left after inheritance tax | £60,000 |
| Income tax at 45% on £60,000 | £27,000 |
| Son keeps | £33,000 |
| Combined effective rate | 67% |
For a 40% taxpayer the figure is 64% (£40,000 plus £24,000). A large lump sum in a single tax year can also push the recipient into a higher band or into the £100,000 to £125,140 range where the personal allowance is withdrawn, so the timing of withdrawals matters.
Pensions and the £2 million taper
The residence nil rate band of £175,000 is reduced by £1 for every £2 by which the estate exceeds £2 million. Because pensions now count towards the estate, some families will lose this band for the first time.
Example: a widower has a £1.8 million estate, including a home left to his children, and a £500,000 pension. His late wife left everything to him, so his own bands are £325,000 and £175,000 (we have ignored her transferred bands to keep this simple). Today his tax would be (£1,800,000 − £500,000) × 40% = £520,000. From April 2027 his estate is £2.3 million, so his residence band falls by £150,000 to £25,000. Tax: (£2,300,000 − £350,000) × 40% = £780,000. The pension adds £260,000, of which £60,000 comes from the lost residence band. See how much is inheritance tax for the thresholds in more detail.
What this means for planning
For a decade the usual approach was to spend other savings first and leave the pension untouched, because it passed free of inheritance tax. For many people that logic has now reversed, especially over 75, where pension money left behind may face both taxes. These are points to discuss, not a recommendation for any individual: pension decisions depend on income needs, investment risk and charges, and a regulated financial advisor should be involved before you change how you draw or hold your pension.
- Drawing income to make gifts. Regular gifts made out of surplus income, which leave your usual standard of living intact, are exempt immediately. Pension income can be used for this, but records matter.
- The £3,000 annual exemption. You can give £3,000 each tax year free of inheritance tax, and carry forward one unused year.
- Life cover written in trust. A policy held in a suitable trust generally sits outside the estate and can provide cash to meet the bill.
- Who receives what. Leaving pension benefits to a spouse, and other assets to children, may change the overall tax cost.
What to do now
- List every pension you hold, with provider names and current values, and keep the list with your will.
- Review your nomination or expression of wish forms. Many were completed years ago and may not reflect your family or the new tax position.
- Recalculate your estate with pensions included, and check whether you are near the £2 million taper.
- If you are over 75, or close to it, look at the combined inheritance tax and income tax cost for your beneficiaries.
- Revisit your will and gifting plans, including regular gifts from income and life cover in trust.
- Bring in a regulated financial advisor before changing withdrawals or investments, and coordinate the tax and pension advice.
We help families model their position before and after April 2027 and work alongside their financial advisor through our inheritance tax planning service. Book a consultation to review your pensions and estate together.
This article is general information about UK tax, based on the law and HMRC practice at the date shown above. It is not advice, and reading it does not make you our client. Tax rules change and their effect depends on your circumstances, so please speak to us before acting on it.