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From April 2027, unspent pension funds will form part of your taxable estate for inheritance tax. This is arguably the biggest single IHT change of the decade — pensions have been outside the estate since the pension freedoms reforms, and using a pension as an IHT vehicle has been entirely legitimate and widely used. That changes from April 2027.
This guide explains the mechanics, worked examples, and planning options. For a broader view of recent IHT changes see our guide to pensions and inheritance tax from April 2027 and Autumn Budget 2025: Inheritance Tax Changes.
Under the rules that apply until 5 April 2027, defined contribution pension funds — including SIPPs, personal pensions, workplace money purchase pensions — sit entirely outside the estate for IHT. This means:
This made pension funds an extremely effective IHT planning tool. Many financial planners advised clients to draw down other assets first — ISAs, property, savings — and preserve pension funds as long as possible to minimise IHT. A couple with £1m in pension funds could pass all of it to their children with zero IHT, regardless of the rest of their estate.
From 6 April 2027, unspent defined contribution pension funds and unused death benefits will be included in the deceased's estate for IHT purposes. The full value of unspent pension funds at the date of death will be aggregated with the rest of the estate when calculating whether IHT is due.
The pension funds themselves do not change — the money remains in the pension wrapper during the deceased's lifetime. What changes is the IHT treatment when those funds are passed on.
The pension fund value at death will be added to the taxable estate. The nil-rate band (£325,000) and RNRB (£175,000 where applicable) will be applied to the whole estate including pensions. IHT will be charged at 40% on the excess above the available nil-rate bands. The exemptions are unchanged: anything passing to a surviving spouse or civil partner, or to charity, remains exempt, pension funds included.
The original proposal was that pension scheme administrators would report and pay the tax. Most respondents to the technical consultation objected, and the government dropped it. In the summary of responses published on 21 July 2025 it confirmed that from 6 April 2027 "PRs will be liable for reporting and payment of Inheritance Tax due on unused pension funds and death benefits". Beneficiaries become jointly and severally liable from the point they are entitled, and a beneficiary can direct the scheme administrator to pay the inheritance tax to HMRC directly out of the funds rather than receiving the money and settling it themselves. The ordinary six-month payment deadline is unchanged.
Where the pension holder died at or over age 75, benefits drawn by a beneficiary are taxed as income at the recipient's marginal rate. That is unchanged, so from April 2027 the same funds can be inside the estate for IHT and taxable as income when drawn. The government has said HMRC will provide a route for a beneficiary to recover income tax overpaid where inheritance tax also falls due, rather than removing either charge.
Under old rules:
Pension £600k is outside estate. Other estate £800k passes to wife — spouse exemption applies. No IHT on first death. Wife's estate on second death: up to £1m (her assets + inherited assets + his unused NRB/RNRB). Potentially manageable IHT position.
Under new rules from April 2027:
Pension £600k is now in the estate. However, spouse exemption still applies — everything passing to spouse is IHT-free. IHT deferred to wife's death. At wife's death: estate could include her own pension, inherited pension, house and other assets — potentially facing 40% on amounts over £1m.
Key takeaway: For couples, spouse exemption remains; the crunch comes on second death.
Under old rules:
Taxable estate: £550,000 (house + savings). Pension excluded. IHT: (£550k − £325k) × 40% = £90,000.
Under new rules from April 2027:
Taxable estate: £1,050,000 (all assets including pension). IHT: (£1,050k − £325k) × 40% = £290,000.
Additional IHT due to pension inclusion: £200,000.
The rest of the IHT system is untouched by this measure. The four things people most often ask about are set out below — as descriptions of how the rules interact, not as recommendations. Pensions are a regulated area, and the person who can weigh these against a particular set of circumstances is an FCA-regulated financial adviser.
Money drawn out of a pension is taxed as income at the time (up to 45%), and what is left is then an ordinary asset in the estate. Once drawn, it can be gifted using the normal expenditure out of income exemption or used to fund regular gifts.
Money that has been drawn from a pension can be given away like any other asset. An outright gift is a potentially exempt transfer, so it only falls out of the estate once the donor has survived it by seven years — unless it fits an exemption, in which case it is outside the estate immediately. The full range of gifting strategies remains available. The normal expenditure out of income exemption has no cash limit, but it is tightly conditioned: the gifts must form part of a regular pattern, come out of income rather than capital, and leave the donor enough income to maintain their usual standard of living.
Pension nominations determine who receives the pension on death. A nomination to a spouse or civil partner falls within the spouse exemption, so no IHT arises on it. A nomination to a child or grandchild brings the fund into the IHT calculation, and where the member died at 75 or over the beneficiary also pays income tax on what they draw.
A whole-of-life insurance policy written in trust can be sized to cover the expected IHT on pension funds. The policy payout falls outside the estate (if in trust), providing liquidity to pay IHT without reducing the pension passed to beneficiaries. See our guide to life insurance in trust.
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