Pensions and Inheritance Tax from April 2027: What Changes, What Is Excluded and Who Pays — A Plain Guide
Many people in the UK hold a pension pot they may never spend, and until now what was left could usually pass on outside the estate for Inheritance Tax. From 6 April 2027 that changes: most unused pension funds and pension death benefits will count as part of the estate. This guide explains what is changing and from when; which benefits are in scope and which stay outside, such as death-in-service benefits and dependants' scheme pensions from defined benefit schemes; how the change sits with the nil-rate bands, the spouse or civil partner exemption and the income tax beneficiaries may still pay; and why the personal representatives are responsible for reporting and paying, and how the pension scheme can be asked to pay. It ends with the questions worth taking to a regulated financial adviser. It is general information, not personal advice: everyone's position differs, and it recommends no provider and names no brand.
Unused pension funds and pension death benefits inside the estate: what is changing for Inheritance Tax and from which date
From 6 April 2027, unused pension funds and most pension death benefits will be included in the value of a person’s estate for Inheritance Tax (IHT) purposes. This means that pension pots that are not spent during retirement will generally be treated like other assets when someone dies. The change applies to registered pension schemes, including defined contribution arrangements and some defined benefit schemes where a lump sum death benefit is payable. The date is fixed: 6 April 2027. Deaths before that date will follow the current rules, where pension death benefits are usually paid outside the estate and are not subject to IHT. After that date, the value of unused pension funds will be added to the estate total when calculating any IHT due. This is a significant shift because pensions have long been used as a way to pass on wealth free of IHT.
What is in scope and what stays outside: drawdown funds, lump sums, death-in-service benefits and dependants’ scheme pensions
In scope from April 2027 are unused drawdown funds, uncrystallised pension pots, and most lump sum death benefits paid from a pension scheme. If a person dies with money still invested in a drawdown arrangement or a pension they have not yet accessed, that value will count towards their estate. Lump sums paid to beneficiaries will also be brought into the estate. However, some elements stay outside. Death-in-service benefits, which are typically paid as a lump sum to dependants, remain outside the estate in most cases. Dependants’ scheme pensions, which provide a regular income to a surviving spouse, civil partner, or dependent child, also remain outside. The key distinction is between unused funds that could have been spent or passed on, and benefits designed to replace income for dependants. Charitable donations from pension funds may also be treated differently, but the main focus is on unused pots and lump sums.
How pension money sits with the nil-rate band, the residence nil-rate band, the spouse exemption and beneficiaries’ income tax
When pension funds are added to the estate, they use up the available nil-rate band (NRB), which is currently £325,000. The residence nil-rate band (RNRB) may also be affected, as it applies to the family home passed to direct descendants. If pension money increases the estate value, it could reduce the amount of RNRB available or push the estate over the threshold. The spouse exemption still applies: anything left to a spouse or civil partner is generally free of IHT, so pension funds passed to a spouse may not trigger a charge. However, if the surviving spouse later dies, the pension money could form part of their estate. Beneficiaries who receive pension death benefits may also face income tax. Lump sums are usually tax-free if the person died before age 75, but taxed at the beneficiary’s marginal rate if death occurred after 75. Dependants’ scheme pensions are taxed as income. These interactions mean that the order in which funds are used and the nominations on file matter.
Who reports and pays after a death: the personal representatives, the beneficiaries, scheme withholding and direct payment
After a death, the personal representatives (executors or administrators) are responsible for reporting the estate to HMRC and paying any IHT due. From April 2027, they will need to include the value of unused pension funds on the IHT account. Pension scheme administrators may be required to withhold tax or pay directly to HMRC in some cases, but the primary liability usually falls on the personal representatives. Beneficiaries may receive reduced payments if the scheme deducts IHT before paying out. It is important to keep accurate records of pension nominations and to understand whether a scheme will pay a lump sum or a dependants’ pension. The reporting process can be complex, so professional advice is often needed to ensure correct disclosure and payment. The government has indicated that further guidance will be issued before April 2027.
Questions for a regulated adviser: drawdown order, gifts from surplus income, nominations, whole-of-life cover in trust
When reviewing your pension and estate plans, a regulated adviser can help with several practical questions. Should you draw down from certain pots first to reduce the amount left in your estate? Can you make gifts from surplus income to reduce the estate over time? Are your pension nominations up to date, and do they reflect your wishes? Would whole-of-life cover in trust provide a tax-efficient way to cover any IHT bill? These are not one-size-fits-all answers. The right approach depends on your health, family circumstances, and the type of pension you hold. Advisers may also discuss the order of withdrawals, the use of spousal exemptions, and the potential impact on beneficiaries’ income tax. Because the rules change in April 2027, reviewing your plans now can help you avoid unexpected tax charges.
Real-world cost and pricing insights
Pension and IHT planning often involves costs. Financial advice fees vary: a one-off review might cost between £500 and £2,500, while ongoing advice can be 0.5% to 1% of assets annually. Whole-of-life insurance premiums depend on age, health, and cover amount; a healthy 60-year-old might pay £100 to £300 per month for £200,000 of cover in trust. Probate and estate administration fees can range from £1,000 to £5,000 or more, depending on complexity. These figures are estimates and may change. It is wise to obtain several quotes and check whether advice is independent.
| Product/Service | Provider | Cost Estimation |
|---|---|---|
| Independent financial advice (one-off) | Various FCA-regulated firms | £500 – £2,500 |
| Ongoing advice (annual) | Various FCA-regulated firms | 0.5% – 1% of assets |
| Whole-of-life insurance in trust | Major UK insurers (e.g., Aviva, Legal & General) | £100 – £300 per month for £200,000 cover (age 60, healthy) |
| Probate and estate administration | Solicitors and probate services | £1,000 – £5,000+ |
Prices, rates, or cost estimates mentioned in this article are based on the latest available information but may change over time. Independent research is advised before making financial decisions.
The changes coming in April 2027 will affect many people who hold unused pension funds. While some benefits, such as dependants’ scheme pensions and death-in-service payments, remain outside the estate, the core message is that pensions will no longer be a simple way to avoid IHT. Understanding the interaction with the nil-rate band, spouse exemption, and beneficiaries’ income tax is essential. Personal representatives will need to report pension values, and beneficiaries may see reduced payouts. Seeking regulated advice can help you plan withdrawals, update nominations, and consider alternatives like whole-of-life cover in trust. As with all tax matters, individual circumstances vary, so a personalised review is recommended.
