Pension inheritance · Guide

The 2027 pension IHT reform — what you need to know.

From 6 April 2027, unused DC pension funds will be included in the estate for inheritance tax purposes. The change is confirmed in legislation and removes one of the most significant tax advantages pensions currently hold.

By Pension Bible editorial team·Last reviewed 9 April 2026·5 min read

What the current rules are

Under the rules in place as of April 2026, DC pensions — workplace pensions, SIPPs, personal pensions — sit entirely outside the estate for inheritance tax purposes.

When a pension holder dies:

• The remaining DC pot is not added to the estate value
• No IHT is charged on the pension, regardless of pot size
• If death is before 75, beneficiaries receive the pot free of income tax too
• If death is at 75 or older, beneficiaries pay income tax (not IHT) on withdrawals at their marginal rate

This treatment exists because DC pensions are held in trust or under scheme administrator discretion. The member does not have a legal right to direct the funds to a specific person — they file an expression of wishes that guides the trustees, but does not bind them. That discretionary element is the legal basis for the IHT exemption.

The result: pensions are the only major UK asset class that avoids IHT entirely. Property, ISAs, bank accounts, general investments, and premium bonds are all within the estate. The pension is the exception — and for large pension pots, the tax saving is substantial. A £500,000 pot that would attract £200,000 in IHT if it were an ISA passes entirely IHT-free as a pension.

What changes from 6 April 2027

At the Autumn Budget 2024, the Chancellor announced that from 6 April 2027, unused DC pension funds will be brought within the scope of IHT. Following the consultation that closed in January 2025 and the government's response, the reform has been confirmed and the implementing legislation is in train.

The change means:

• The remaining DC pension pot at death is added to the estate value for IHT calculation purposes
• If the combined estate (including pension) exceeds the nil-rate band, 40% IHT applies to the excess
• Income tax on withdrawals still applies for deaths after 75 — meaning the same money is exposed to both IHT and income tax

The government has confirmed that relief for the interaction between IHT and post-75 income tax will be provided, with the operational mechanism set out in regulations and HMRC guidance.

The reform does not affect:

• DB pensions (which pay a defined income, not a transferable pot)
• The state pension (which has no death benefit beyond a limited bereavement payment)
• The income tax treatment of inherited pensions (the before-75 / after-75 rules remain unchanged)

Who is most affected

The reform is progressive in impact — it affects larger estates more than smaller ones.

Minimal impact:

• Individuals whose total estate (including pension) falls below the nil-rate band (£325,000, or up to £500,000 with the residence nil-rate band). No IHT would be due regardless.
• Married couples who can combine their allowances — up to £1 million in combined nil-rate bands — may also fall below the threshold.

Significant impact:

• Individuals with DC pension pots above £200,000 whose total estate (property, savings, investments, and pension combined) exceeds the nil-rate band
• People who have deliberately preserved their pension pot for IHT purposes — spending ISAs and other assets first under a "pension last" strategy
• Business owners or high earners who have maximised pension contributions as part of an estate planning strategy

Worked example: A single person dies at 78 with a £350,000 DC pension, a £300,000 house, and £100,000 in savings. Total estate: £750,000.

• Under current rules: Only the house and savings count for IHT — £400,000. With a nil-rate band of £500,000 (including residence nil-rate band), IHT = £0. Beneficiaries pay income tax on pension withdrawals only.
• Under rules from 6 April 2027: The pension is added — £750,000. IHT on the excess: (£750,000 − £500,000) × 40% = £100,000. Plus income tax on pension withdrawals. The pension that previously cost nothing in IHT now generates a £100,000 bill.

The pension inheritance calculator models both pre-reform and post-reform rules.

Actions to consider before the change

The reform is confirmed, but the operational detail continues to bed in. Several considerations are relevant:

Review the expression of wishes. Regardless of the IHT rules, the nomination form determines who receives the pension. Ensuring it's current is the single most important administrative step. See the nominations guide.

Reassess withdrawal sequencing. Under pre-reform rules, the "pension last" strategy — spending ISAs and cash first to preserve the IHT-free pension — is rational. From 6 April 2027 that logic weakens: the pension pot counts towards the estate regardless, so preserving it for IHT reasons alone no longer helps. The optimal withdrawal order may shift, and modelling under the new rules is now worthwhile.

Consider the pension's other advantages. Even after losing the IHT exemption, pensions retain other benefits: tax-free growth within the wrapper, 25% tax-free lump sum on crystallisation, and the before-75 income tax exemption for beneficiaries. The pension remains a tax-efficient savings vehicle — it just becomes less exceptional for estate planning.

Avoid acting too aggressively too early. Crystallising a large taxable withdrawal in 2026/27 to move money out of the pension wrapper before the change can lock in income tax that would otherwise have been avoided. Whether pre-reform action makes sense depends on age, marginal tax rate, and pot size — model the alternatives carefully.

The pensions and inheritance tax guide covers the broader IHT picture, and the pension lump sum tax calculator can model the tax cost of withdrawals.

This is factual information, not financial advice. If you're unsure what's right for your situation, speak to an FCA-regulated financial adviser.