Pension Inheritance Tax UK Personal Finance
9 minute read · Updated May 2026
For over a decade, one of the most consistent pieces of UK retirement planning advice was to spend your ISA and other savings first in retirement, and leave your pension pot untouched for as long as possible. The reason was straightforward: unused pension funds sat outside your estate for inheritance tax purposes. When you died, whatever was left in the pension could pass to your children or grandchildren without the 40% IHT charge that hit everything else. It was a genuinely significant tax advantage that shaped how many people structured their retirement finances.
That advantage ends on 6 April 2027.
From that date, unused defined contribution pension funds will be included in your estate for inheritance tax. The rule change was announced by Rachel Reeves in the 2024 Autumn Budget, confirmed after consultation in July 2025, and is now in draft legislation. It is coming. The question is what it means for you and whether there is anything worth doing before it arrives.
I want to be clear upfront: this is not financial advice, and the interaction between inheritance tax and pension planning is genuinely complex enough that a financial adviser with estate planning experience is essential before making any significant changes. What I can do is explain clearly what is changing, who it affects, and the questions worth asking.
Currently, most defined contribution pension funds are discretionary — meaning the pension trustees have discretion over who receives the death benefits. Because of this discretionary nature, the funds sit outside your estate for IHT purposes. They do not count toward the value of your estate, so they are not subject to the 40% IHT charge that applies above the nil-rate band.
From 6 April 2027, this changes. Unused DC pension funds and most lump-sum death benefits from registered pension schemes will be brought into your estate for IHT. If the total value of your estate — including your pension — exceeds your available nil-rate bands, the excess will be taxed at 40%.
The government's stated rationale is that pensions have increasingly been used as an estate planning vehicle rather than purely as a retirement income tool — people deliberately preserving pension funds to pass on tax-efficiently while spending other assets first. The view is that this was not the intended purpose of pension tax relief, and the change removes that incentive.
The government's own estimates put the number of affected estates at around 10,500 per year — roughly 1.5% of all UK deaths. That sounds small, but it represents a significant number of families who will face new IHT liability that simply did not exist before.
The people most affected are those who have both a substantial unused pension pot and other assets — property, savings, investments — that together push the estate above the nil-rate bands. The standard nil-rate band is £325,000, with an additional £175,000 residence nil-rate band available when leaving a home to direct descendants. Married couples can combine these, giving a potential combined allowance of £1 million.
A realistic scenario: someone who dies with a £400,000 house, £150,000 in savings and ISAs, and £200,000 in an unused pension pot has a total estate of £750,000. Currently, the pension sits outside the estate — so the IHT calculation is on £550,000, and with a nil-rate band of £500,000 (standard + residence), the taxable estate is just £50,000. From April 2027, the pension is included, making the estate £750,000 — and the taxable portion £250,000. That is a £100,000 IHT bill that simply does not exist under current rules.
The change is particularly harsh for estates where the pension holder dies after age 75. Under current rules, if someone dies before 75, beneficiaries can inherit the pension and draw from it completely tax-free. After 75, withdrawals from the inherited pension are taxed at the beneficiary's marginal income tax rate.
From April 2027, both charges can apply simultaneously on post-75 deaths. The pension is hit by IHT at up to 40% before reaching the beneficiary. Then when the beneficiary draws income from what remains, they pay income tax at their marginal rate. For a higher rate taxpayer inheriting a pension from someone who died after 75, the combined effective tax rate on that money can be extremely high — in some scenarios approaching two-thirds of the pot's value going to HMRC between the two charges.
HMRC has introduced an income tax credit mechanism to prevent the most extreme outcomes, but the headline numbers remain significantly worse than the current position for this group.
The standard retirement drawdown strategy for the past decade was: spend ISAs, cash, and other savings first — draw on the pension last. This minimised income tax in retirement (by keeping drawdown low) while preserving the pension as an IHT-free inheritance vehicle.
From April 2027, that logic no longer holds for many people. If the pension is going to be subject to IHT anyway, the case for preserving it at the expense of spending other assets weakens significantly. Drawing down the pension and spending or gifting the proceeds — within gifting rules — may in some circumstances produce a better outcome than leaving it untouched.
But this is genuinely complex territory. Drawing down a large pension pot increases taxable income in retirement, potentially pushing more income into higher rate tax. Gifting money early creates its own rules — the seven-year rule for potentially exempt transfers, annual gift allowances, and so on. I find this is exactly the kind of area where the internet can give you enough information to feel informed but not enough to make the right decision. A financial adviser and a solicitor or tax specialist are genuinely necessary here.
A few important exemptions and clarifications worth knowing:
Spouse exemption preserved. Assets passing between spouses and civil partners remain exempt from IHT, including pension funds. The change affects what happens when the second person in a couple dies, or when an unmarried pension holder dies.
Death-in-service benefits. Discretionary death-in-service lump sums from employer schemes are not brought into the change — these remain outside the estate.
Defined benefit pensions. The change primarily affects defined contribution pensions. Defined benefit (final salary) pensions that pay out as an ongoing income rather than a lump sum are treated differently — though death-in-service lump sums from DB schemes may be affected.
Already accessed pensions. If you have already started drawing your pension flexibly, the funds you have withdrawn and any remaining pot may be treated differently depending on the crystallisation status. This is one of the more technical areas and worth clarifying with your pension provider or adviser.
Given the complexity, my honest view is that trying to self-navigate this change without professional help is not sensible for anyone with a meaningful pension pot. But there are questions worth going into that conversation with:
The April 2027 change removes a significant IHT advantage that pension funds have held for decades. It affects around 1.5% of estates directly — those with substantial unused pensions alongside other assets above the nil-rate bands. The interaction between IHT and income tax on inherited pensions is genuinely complex, particularly for post-75 deaths. The strategy that made sense for the past decade — spend everything else, preserve the pension — needs reviewing for many people. This is one area where the cost of professional advice is almost certainly justified by the potential tax saving. Do not leave it until 2027.
The free calculator models your pension pot at different contribution rates and shows projected retirement income — useful context when reviewing your retirement strategy.
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