From 6 April 2027, unspent defined contribution pension pots will be brought into your estate for inheritance tax (IHT) purposes. This is one of the biggest changes to pension planning in a generation — reversing a rule that made pensions one of the most tax-efficient ways to pass wealth to heirs.
If you have a SIPP, workplace pension, or other DC pension and had planned to leave it to your family, this change directly affects your estate planning strategy.
What Is Changing
| Before April 2027 | From April 2027 | |
|---|---|---|
| Unspent DC pension pot | Outside estate — no IHT | Inside estate — IHT applies at 40% |
| Pension + estate value | Pension ignored for IHT threshold | Pension added to calculate estate total |
| Death before age 75 (pension) | Inherited tax-free by beneficiary | IHT on estate, then income tax for beneficiary on withdrawals |
| Death after age 75 (pension) | Beneficiary pays income tax on withdrawals | IHT on estate, then income tax for beneficiary on withdrawals |
| DB pension lump sum death benefit | Often outside estate | Likely taxed — depends on scheme rules |
State Pension is not affected — there is no pot to pass on.
Who Is Affected
The change primarily affects:
- Anyone with a SIPP (Self-Invested Personal Pension)
- Anyone with a workplace DC pension who may not spend all of it
- Anyone using pensions as a deliberate IHT planning tool — i.e. retaining large unspent pots to pass to heirs
It is less relevant to:
- People who will spend their pension entirely during retirement (most people)
- Those with modest estates below the nil rate band regardless of pension
- Defined benefit (final salary) pension members — though check your scheme’s death benefit rules
How Inheritance Tax Works
IHT is charged at 40% on the portion of your estate above the nil rate band:
| Allowance | Amount |
|---|---|
| Nil rate band (everyone) | £325,000 |
| Residence nil rate band (leaving home to direct descendants) | £175,000 |
| Combined maximum (qualifying estates) | £500,000 |
| Married couples / civil partners: combined allowance | Up to £1,000,000 |
Worked example:
David, age 70, has:
- House: £350,000
- ISA and savings: £80,000
- SIPP: £200,000
Before April 2027: Estate for IHT = £430,000 (SIPP excluded). IHT = (£430,000 − £325,000) × 40% = £42,000.
After April 2027: Estate for IHT = £630,000 (SIPP included). IHT = (£630,000 − £325,000) × 40% = £122,000.
The pension inclusion increases David’s IHT bill by £80,000.
The Double Tax Problem
From April 2027 there is a potential double tax on inherited pensions:
- IHT at 40% is paid by the estate when you die
- Income tax is paid by the beneficiary when they draw funds from the inherited pension (always applied for deaths after age 75; also for deaths before 75 under the new rules)
This means a higher-rate taxpayer inheriting a pension could face an effective combined tax rate of over 60% on the inherited funds, depending on their income level.
Note: The government has indicated the pension scheme administrator will handle IHT payments directly in most cases, rather than requiring beneficiaries to pay and reclaim.
Planning Strategies to Consider
1. Spend From Pension First
The most straightforward approach: draw from your pension in retirement before touching ISAs, premium bonds, or other savings. This reduces the unspent pot available to be taxed on death.
- Pension withdrawals are subject to income tax (above the 25% tax-free cash)
- Withdrawing in lower-tax years (e.g. early retirement before taking State Pension) minimises income tax
- Compare: income tax now at 20–40% vs IHT + income tax later at a combined rate that may be higher
2. Use ISA and Non-Pension Assets Last
Keep your ISA and other non-pension assets as long as possible — they don’t generate an income tax bill on withdrawal, making them valuable to preserve for spending in later retirement.
3. Annual Gifting
You can give away up to £3,000/year IHT-free (the annual exemption). Unused allowance from the previous year can be carried forward once. Larger gifts may be exempt if you survive 7 years (Potentially Exempt Transfers, or PETs).
| Gift type | IHT treatment |
|---|---|
| Annual exemption (£3,000/yr) | Immediately exempt |
| Gifts out of surplus income | Exempt if regular pattern established |
| Potentially Exempt Transfer (PET) | Exempt after 7 years; tapered relief 3–7 years |
| Gifts into trust | Chargeable immediately above nil rate band |
4. Review Nomination Forms
Your pension nomination form tells the scheme trustees who you want to receive the pension on your death. Trustees still have discretion, but nominations are followed in the vast majority of cases.
Important: Nomination forms do not affect IHT treatment from April 2027 — the pot will be included in your estate regardless of who you nominate. Update your form to reflect your wishes, but do not expect it to shelter the pot from IHT.
5. Consider Drawdown Sequencing
The order in which you draw income in retirement affects how much is left in your pension pot on death:
| Source | Draw first if… |
|---|---|
| Pension (taxable above 25% TFLS) | You want to reduce the pot and have headroom in your tax band |
| ISA | You want to preserve tax-free access for later retirement |
| Cash / savings | Higher earners may prefer to use taxable accounts early to preserve ISA |
What This Does NOT Change
- 25% tax-free cash (PCLS): You can still take 25% of your pension pot tax-free on retirement (capped at £268,275 lifetime). This is unaffected by the IHT change.
- Spousal/civil partner exemption: Assets passing between spouses and civil partners are still free of IHT regardless.
- State Pension: No pot — unaffected.
- Defined benefit income: The regular income payments from a DB pension are not a pot and are not subject to IHT.
Timeline and Next Steps
| Date | Action |
|---|---|
| Now | Review your estate including pension — does it exceed nil rate band thresholds? |
| Now | Update pension nomination forms to ensure they are current |
| Now | Model your drawdown order — is it worth spending from pension earlier? |
| Before April 2027 | If your estate is large, speak to a financial adviser about sequencing strategy |
| April 2027 | New rules take effect for deaths from this date |
See our pension tax relief guide for how pension contributions work, our inheritance tax guide for the full IHT framework, and our SIPP guide for managing your self-invested pension.