Farra is a death administration assistant for UK families. Get step-by-step guidance for registering a death, applying for probate, notifying banks, and managing bereavement admin. From essential documents to practical checklists, Farra simplifies estate paperwork and funeral-related tasks so you can focus on what matters.
Currently, pension death benefits are generally outside the taxable estate and can be paid directly to nominated beneficiaries without IHT. From April 2027, this changes significantly: unspent pension funds will be counted as part of the deceased's estate for IHT purposes. The OBR estimates this will pull approximately 50,000 additional estates per year into the IHT net. Executors need to understand this now, because the practical implications — including a new withholding mechanism — are significant.
Under the current rules (before April 2027), most pension death benefits — whether paid as a lump sum or as continuing pension payments to a dependant — fall outside the deceased's estate for IHT purposes. This is why pensions have become a popular tool for passing wealth to the next generation: they avoid both probate and inheritance tax.
From April 2027, this exemption is removed for unused pension funds. Specifically:
These changes primarily affect estates where the deceased held a defined contribution pension with remaining unspent funds at the time of death. This includes:
Defined benefit (final salary) pensionswork differently: they typically pay a spouse's or dependant's pension rather than a lump sum, and are largely unaffected by the April 2027 changes.
The OBR projects that around 50,000 additional estates per year will become liable for IHT as a result of pensions being included — estates that previously fell below the IHT threshold but will now be pushed above it when the pension is counted.
One of the most significant practical changes is the new withholding mechanism. Because pension providers will now need to coordinate with the executor and HMRC to calculate the IHT before releasing the full pension, the legislation allows pension providers to:
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This means beneficiaries of pension death benefits may receive only half of what they expected, initially, while the IHT is sorted out. The remaining 50% is held by the pension provider until the tax is settled.
For a dedicated guide on the withholding rule, see our guide to inherited pensions being frozen.
The April 2027 changes create significant new responsibilities for executors. Under the new rules, executors will need to:
This is a considerably more complex process than the current rules, and HMRC is still publishing detailed guidance through 2026. Executors dealing with estates that include pensions should strongly consider taking professional advice.
If your loved one died before April 2027, the current rules still apply — pension funds are outside the estate for IHT purposes.
Whether you are dealing with an estate now or planning for the future, the practical steps are:
For further context on pensions after death, see our guide on claiming private and workplace pensions and our guide on pension death benefits and nomination forms. Pensions are just one of the assets you need to track after a death — Farra helps you manage every task in one place — get started here.
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