Pensions and Inheritance Tax from April 2027 — What the Rule Change Means

The Current Position — Pensions Outside IHT

Under the rules that apply before April 2027, defined contribution pension funds (including SIPPs and workplace money purchase pensions) that remain undrawn at death generally fall outside the deceased's estate for inheritance tax purposes. This made pensions one of the most powerful IHT planning tools available — individuals could draw down other assets first and leave pension funds to pass to beneficiaries IHT-free.

The result was a deliberate strategy adopted by many retirees: spend ISAs, savings and other assets first, and preserve the pension pot as an IHT-efficient inheritance.

The 2024 Autumn Budget Announcement

In the October 2024 Autumn Budget, the Chancellor announced that from 6 April 2027, most unused pension funds and death benefits payable from pensions will be brought into scope for inheritance tax. This represents one of the most significant changes to pension and estate planning in a generation.

Defined benefit (final salary) scheme lump sums on death and some discretionary payments by pension scheme trustees may be treated differently — the detailed legislation and HMRC guidance were still being finalised as of early 2026, and the rules continue to be subject to consultation.

How the New Rules Will Work

From April 2027, the pension fund will be added to the deceased's estate for IHT assessment purposes. IHT will be assessed on the combined value of the estate (including the pension) against the available nil rate band and residence nil rate band. The pension scheme administrator will be responsible for paying any IHT attributable to the pension fund before distributing the balance to beneficiaries.

The personal representatives (executors) and the pension scheme administrator will need to co-ordinate to calculate and pay the correct IHT. This adds complexity to estate administration.

What This Means for IHT Planning

Many individuals who held large pension pots specifically to pass them on IHT-free will need to reassess their strategy. The combined effect could be significant:

• A person with a £500,000 pension pot and a £400,000 estate (above the NRB) previously had total IHT exposure on the £400,000 estate only. Post-April 2027, the £900,000 combined figure would be assessed.
• At a 40% rate, the additional IHT on the pension (above unused NRB/RNRB) could be substantial.

Planning Steps to Consider Before April 2027

• Review beneficiary nominations on all pension schemes — these should be up to date and reflect your current wishes
• Consider drawing down pension funds and using them (or gifting them as PETs) during your lifetime, rather than leaving them in the pension
• Reassess ISA and pension drawdown sequencing — the old rule of spending ISAs before pensions may need to be reversed
• Seek independent financial advice — the interaction between pension drawdown, income tax, and IHT requires holistic planning

The Position on Property

Property held in an estate is already fully subject to IHT. The April 2027 change does not affect how property itself is taxed — it simply means that pension funds can no longer be used as a shelter to reduce the effective IHT rate on property-heavy estates.

Use our [Inheritance Tax Calculator](/inheritance-tax-calculator) to model your estate's IHT exposure, and consider seeking regulated financial advice to plan ahead of the April 2027 changes.

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