From 6 April 2027, unspent pension pots will be included in your estate for inheritance tax for the first time. Announced in the October 2024 Autumn Budget, this is the biggest change to pension taxation in a generation. For decades, pensions have been one of the most powerful tools for passing wealth outside the estate — that advantage is ending. If you have a defined contribution pension and a taxable estate, you need to understand this change and plan around it now.
For current IHT thresholds and allowances, see our Inheritance Tax Thresholds guide. For how pensions are currently taxed on death, see What Happens to Your Pension When You Die.
What Changes on 6 April 2027
| Rule | Before April 2027 | From April 2027 |
|---|---|---|
| Pension in estate for IHT? | No — pension sits outside the estate | Yes — unused pension included in estate |
| IHT on pension if under NRB | Not applicable | No IHT (covered by nil-rate band) |
| IHT on pension above NRB | Not applicable | 40% on excess |
| Death before 75: beneficiary income tax | None | None (unchanged) |
| Death after 75: beneficiary income tax | At beneficiary’s marginal rate | At beneficiary’s marginal rate (unchanged) |
| Spouse exemption | Pension outside estate anyway | Pension included in estate but passes IHT-free to spouse (spousal exemption still applies) |
The income tax treatment of pension withdrawals by beneficiaries does not change. What changes is the IHT liability on the pot before it reaches the beneficiary.
Who Is Affected
The change principally affects people who:
- Hold a defined contribution pension (SIPP, workplace money purchase scheme, personal pension)
- Have an estate that will exceed their nil-rate band (£500,000 per person, £1,000,000 for couples including the residence nil-rate band)
- Die with unspent pension funds — if you spend your pension in retirement, there is nothing to include in the estate
If your pension plus all other estate assets stay within your available nil-rate band, no IHT will be due regardless of the 2027 change.
Example: who is not affected Sarah has a SIPP worth £150,000, a house worth £280,000 and savings of £30,000. Total estate: £460,000. Her nil-rate band is £500,000. No IHT either before or after April 2027.
Example: who is affected David has a SIPP worth £400,000, a house worth £450,000 and savings of £100,000. Total estate: £950,000. His nil-rate band with RNRB is £500,000. Currently: pension is outside estate, so IHT applies to £450,000 of non-pension assets (£450,000 − £500,000 = £0 after NRB, actually below threshold). From April 2027: the full £950,000 is in scope, giving £450,000 above the threshold — an IHT bill of £180,000.
How IHT Will Work on Pensions from April 2027
HMRC has proposed that the pension scheme administrator will be responsible for reporting the pension value to HMRC and paying any IHT due from the pension fund before passing the remainder to beneficiaries.
This is important: the IHT is deducted from the pension before the beneficiary receives it — your executors do not need to fund the IHT bill from other estate assets.
The mechanics:
- You die on or after 6 April 2027 with an unspent pension
- The pension administrator reports the pension value to HMRC
- IHT is calculated on the total estate, including the pension
- The pension administrator pays IHT due on the pension portion directly to HMRC
- The remaining pension passes to your nominated beneficiaries
- Beneficiaries then pay income tax on withdrawals (as now — this is unchanged)
For pensions passed to a spouse or civil partner, the spousal exemption applies — no IHT regardless of estate size.
The Double Tax Problem
The most significant concern is the potential for double taxation on pensions passed to non-spouse beneficiaries who are higher or additional rate taxpayers.
Example: pension passed to a higher-rate taxpayer child
- Pension pot at death: £200,000
- IHT due at 40% on the pension (assuming above nil-rate band): £80,000
- Pension received by child after IHT: £120,000
- Child withdraws pension and pays 40% income tax: £48,000
- Net received: £72,000 from a £200,000 pot — an effective rate of 64%
By contrast, the same pension passed today (before April 2027) would attract only the 40% income tax on withdrawal — a £120,000 net, not £72,000.
This double taxation effect is the core reason why planning the drawdown order and beneficiary nominations matters urgently.
Strategies to Plan Around the Change
1. Spend ISAs and Non-Pension Savings First
Before April 2027, the optimal retirement drawdown order was often: spend savings → draw ISA → spend pension last (keeping pension outside estate).
After April 2027, the calculus is different. If your estate will exceed your nil-rate band, there is less reason to preserve the pension at the expense of ISA funds. The pension is no longer uniquely IHT-exempt.
However, the pension still has advantages that remain:
- Tax-free growth inside the pension
- Spouse can still inherit IHT-free
- If beneficiaries are non-taxpayers or basic rate taxpayers, the income tax hit on withdrawal is lower
For most people, the pension is still an efficient vehicle — just no longer uniquely so for IHT.
2. Update Your Expression of Wishes
Your pension nomination (expression of wishes) tells the pension trustee who you want to receive your pension. This is separate from your will and overrides it.
After April 2027, who you nominate can significantly affect the total tax paid:
| Nominee | IHT outcome | Income tax on withdrawal |
|---|---|---|
| Spouse / civil partner | IHT-free (spousal exemption) | Taxed at their rate |
| Children — non-taxpayer | IHT may apply | 0% income tax |
| Children — basic rate (20%) | IHT may apply | 20% income tax |
| Children — higher rate (40%) | IHT may apply | 40% income tax |
| Grandchildren | IHT may apply | At their rate |
| Discretionary trust | IHT may apply | Complex — trustee / beneficiary rules |
Check your nominations now and update them to reflect your current wishes and family circumstances. Contact your pension provider directly — most allow online updates.
For help with nominations, see our What Happens to Your Pension When You Die guide.
3. Consider Your Drawdown Order
If your pension and other assets together exceed your nil-rate band, consider whether drawing down the pension faster (and spending or gifting those funds) makes more sense than preserving it.
Gifting from drawn pension funds: You can give away up to £3,000/year immediately IHT-free, plus normal expenditure from income, plus potentially exempt transfers (PETs) if you survive seven years.
The Potentially Exempt Transfer (PET) rule means gifts given more than 7 years before death are completely outside the estate. If you are in good health, drawing pension funds now and gifting them can shift wealth out of the estate more efficiently than leaving the pension to be included from 2027.
See our IHT Planning Guide for the full gift and PET strategy.
4. Review the ISA vs Pension Decision
For new pension or ISA contributions, the April 2027 change slightly weakens the case for pension contributions solely on IHT grounds. However, pension contributions still attract:
- Tax relief at your marginal rate on the way in (ISAs do not)
- Tax-free growth (same as ISA)
- No tax on employer contributions (ISAs receive no employer input)
For most savers, pensions still win on the way in. The IHT change makes the two vehicles more equal in estate planning terms for those with large estates — but does not reverse the contribution advantage.
See our ISA vs Pension Guide for the full comparison.
5. The SIPP as a Planning Tool — What Changes
Before April 2027, wealthy individuals often used SIPPs specifically to hold assets outside the estate — contributing to the pension in later life specifically as an IHT planning tool. HMRC was aware of this.
From April 2027, this strategy loses its IHT exemption. Contributions made purely for IHT avoidance will have reduced effect. However, the pension still benefits from:
- Tax relief on contributions (up to £60,000/year or 100% of earnings)
- Tax-free investment growth
- Flexibility on drawdown timing
For business owners and company directors who route pension contributions through their limited company, see our Pension Tax Relief Guide.
What This Means for Your Pension Pot Size
The impact of the change depends on your total estate size. Here is a quick reference:
| Total estate (including pension) | Couple’s nil-rate band | IHT exposure from April 2027 |
|---|---|---|
| Under £500,000 | £500,000 | £0 — no change |
| Under £1,000,000 (couple) | £1,000,000 | £0 if home left to children |
| £1,200,000 (couple) | £1,000,000 | £80,000 at 40% on £200,000 excess |
| £1,500,000 (couple) | £1,000,000 | £200,000 at 40% on £500,000 excess |
| £2,000,000+ | Reduced/nil RNRB | Substantially higher IHT |
Note: The RNRB of £175,000 per person tapers away on estates above £2,000,000, making planning even more important for large estates.
When to Take Professional Advice
The pension IHT change makes financial planning more complex for anyone with:
- A pension pot over £200,000
- A total estate likely to exceed £500,000 (single) or £1,000,000 (couple)
- Children or other non-spouse beneficiaries you want to inherit
An independent financial adviser (IFA) regulated by the FCA can model the tax impact of different drawdown and gifting strategies. An estate planning solicitor can ensure nominations, wills, and any trust structures work together efficiently.
PocketWise does not recommend specific financial advisers or products. For guidance on when financial advice is worth paying for, see our When to Use a Financial Adviser guide.
For the full context on your pension planning, see our Pension Planning hub and the Inheritance Tax hub.