Your pension was tax-free when you died. From April 2027, it won't be.

For decades, leaving money in your pension was one of the most tax-efficient things you could do for your family. Your unused pension pot passed outside your estate when you died, free from inheritance tax and often free from income tax too.

That changes in April 2027.

From 6 April 2027 most unused pension funds and death benefits will be included in your estate for inheritance tax purposes. If your estate exceeds the inheritance tax threshold, your pension will be taxed alongside everything else you own.

This guide explains what changes, who it affects, what the numbers look like, and what steps are worth taking now.

How it works now

Currently most defined contribution pensions, the kind most people have through work or a SIPP, sit in a discretionary trust structure. Because the pension trustees have discretion over who receives the death benefits, the pension does not legally form part of your estate when you die.

Your unused pension pot passes to your beneficiaries outside your estate, free from inheritance tax. If you die before age 75, beneficiaries can also withdraw the inherited pension free from income tax. If you die at 75 or over, they pay income tax on withdrawals at their marginal rate but no inheritance tax.

This has made pensions an increasingly popular estate planning tool. The government's stated reason for the April 2027 change is to reverse this and restore pensions to their original purpose of funding retirement, not passing on wealth.

What changes from 6 April 2027

From 6 April 2027 most unused pension funds and pension death benefits will count toward the value of your estate for inheritance tax purposes when you die.

The government has published the following figures for 2027 to 2028, based on estates with inheritable pension wealth.

Approximately 38,500 estates will pay more inheritance tax than would previously have been the case, even if they were already liable before the change.

Death in service benefits payable from a registered pension scheme are excluded from these changes and will not be in scope for inheritance tax.

Anything passing to a surviving spouse or civil partner remains exempt, the same exemption that applies to the rest of the estate.

Transfers to a registered charity are also exempt.

Who is affected

The change will not affect most people. If your total estate including your pension is below the inheritance tax threshold, nothing changes for you.

The current inheritance tax nil rate band is £325,000. Most married couples and civil partners can combine this with their partner's unused allowance and the residence nil rate band, giving a combined threshold of up to £1,000,000 for a family home passed to children.

You are more likely to be affected if your estate including your pension exceeds these thresholds. For example: if you own a home worth £400,000, have savings of £100,000, and a pension worth £300,000, your combined estate of £800,000 could face an inheritance tax liability on the amount above your available threshold.

The people most affected are those who have treated their pension primarily as an inheritance planning vehicle, drawing on ISAs and other savings first in retirement and leaving the pension untouched.

The double tax risk

The most important thing to understand is the potential for double taxation.

If your beneficiary inherits a pension that is subject to inheritance tax, and then withdraws money from it, they could in theory face two tax charges on the same money: 40% inheritance tax on the pension value, and then income tax on the withdrawal.

The draft legislation addresses this directly. Income tax will not be payable on the portion of pension death benefits equivalent to the inheritance tax already paid on them. HMRC is building a mechanism to prevent double taxation and enable beneficiaries to reclaim any excess income tax paid.

What is not changing

Several things remain outside inheritance tax after April 2027.

Death in service benefits from registered pension schemes are fully exempt.

Anything passing to a surviving spouse or civil partner is exempt.

Defined benefit pensions that pay an ongoing income to a dependant are exempt.

Joint life annuities are exempt.

The rules apply only to deaths on or after 6 April 2027. If someone dies before that date, the current rules apply regardless of when the pension pays out.

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