Pensions and Inheritance Tax: Is It Time to Review your Estate Planning Before April 2027?

From 6 April 2027, most unused pension funds and pension death benefits will count as part of your estate when inheritance tax is calculated.

For years, most pensions have sat outside the inheritance tax net and have been one of the most efficient ways to pass wealth on. If you have a sizeable pension, now is the time to look again at your arrangements.

Most modern pension schemes pay death benefits at the discretion of their trustees, which is why unused funds have generally been treated as outside a person’s estate. A great deal of retirement and estate planning has been built around that. The new rules turn that thinking on its head.

Is this definitely happening?

Yes. This is now settled law. Finance Act 2026 received Royal Assent on 18 March 2026. HMRC has said it will publish full guidance, templates and online tools in spring 2027. One point of reassurance: the new rules only apply to deaths on or after 6 April 2027. If someone dies before that date, the current rules apply, even if the pension is paid out afterwards.

Will my estate be affected?

Most estates will still pay no inheritance tax at all. However, the government estimates that in 2027-28 around 10,500 estates will become liable when they would not have been before, and a further 38,500 or so will pay more than they otherwise would.

The tax-free allowances are not changing. The nil-rate band, the first £325,000 of an estate, which is taxed at 0%, remains unchanged. The residence nil-rate band gives up to a further £175,000 where a home passes to children or grandchildren. Both are frozen until 5 April 2031.

This is where larger estates may feel the change most. The residence nil-rate band is gradually reduced once an estate is worth more than £2 million. Adding your pension to your estate could push it over that figure and reduce or remove an allowance you would otherwise have had.

Which pension benefits will stay outside the estate?

Some benefits will remain outside the estate. The main exclusions are:

• Death in service benefits, but only if you were employed or working immediately before your death. Benefits from an old workplace scheme you had left before your death will not qualify.
• A regular pension paid to a dependant, such as your husband, wife, civil partner or child.
• Joint annuities, where an annuity was bought jointly so that it continues paying someone you chose, such as your partner, after you die.
• Lump sums paid to charity from your pension (this applies only in limited circumstances).

The usual exemptions also still apply, so anything passing to a husband, wife, civil partner or a UK registered charity remains free of inheritance tax.

What if I am not married?

A pension left to an unmarried partner won’t benefit from the spouse exemption. This is a common trap for unmarried couples. The exemption applies only to married couples and civil partners, however long you have been together. A pension left to an unmarried partner could therefore add to an inheritance tax bill, where the same pension left to a husband or wife would have been tax-free.

Could income tax apply as well?

Yes. If you die aged 75 or over, your beneficiaries will generally pay income tax on what they receive from your pension. Your beneficiaries won’t pay income tax on the part of the pension used to pay inheritance tax, but the combined effect can still be significant. In the worst case, where a beneficiary pays income tax at the highest rate, around two-thirds of a pension could go in tax. Most people, however, won’t be affected to this extent.

What will this mean for executors?

Executors will have considerably more to do. They will need to identify every pension the person held, obtain a valuation from each scheme, find out who the beneficiaries are and report it all to HMRC. In our experience, tracking down old pensions is often one of the slowest parts of dealing with an estate.

Responsibility for the tax is shared. Once the pension scheme decides who will receive the benefits, that person can also be asked to pay the tax on their share. To help, executors or beneficiaries can also ask the scheme to pay the tax straight to HMRC from the pension.

The deadline for paying the tax is tight. Tax is due six months after the end of the month of death and cannot be paid in instalments. Reliefs available for businesses and farms cannot be used against pension funds either. However, executors can ask a scheme to hold back up to half of a beneficiary’s payment for up to 15 months while the tax is worked out.

Estates that are asset-rich but cash-poor will need to plan ahead.

What can you do now to prepare?

April 2027 is closer than it seems. A few measures tend to do the heavy lifting:

• Review your expression of wish form. This is the form that tells your pension scheme who you would like to receive your pension when you die, so check it is up to date.
• Rethink the “pension last” approach. Spending everything else first and leaving your pension untouched no longer makes sense automatically.
• Consider regular gifts from spare income. Regular gifts from genuinely spare income can be free of inheritance tax, provided they form a regular pattern, come from income rather than savings, and leave you enough to live on. Keep good records.
• Look at charitable giving. Leaving at least 10% of your net estate to charity can reduce the Inheritance Tax rate on the rest to 36%, and pension benefits paid to charity count towards this.
• Read your Will and pension together, so your pension does not pass to one person while the tax bill falls on an estate left to somebody else.

Looking ahead

Plans made under the old rules may no longer work as intended. The families who cope best will be those whose Wills and pension arrangements were reviewed together before April 2027.

Contact our Lifetime Planning solicitors today

If you have any questions about anything in the above article, get in contact with our specialist Lifetime Planning team using our online enquiry form or by calling 0330 404 0778.