· 4 min read
Pensions and inheritance tax from April 2027: what changes
From 6 April 2027, most unused pension pots count towards your estate for inheritance tax. What is included, who pays, and what it costs, with worked examples.
From 6 April 2027, most unused pension pots will count towards your estate for inheritance tax. Finance Act 2026 has put the change into law. If you have a home, some savings and a defined contribution pension you have not spent, your family's tax bill could rise sharply.
What is changing
For deaths on or after 6 April 2027, the value of unused pension funds and pension death benefits is added to the estate, whether or not the pension scheme has discretion over who receives them. Until then, most unused pensions sit outside the estate.
The bands and rates stay the same. Everyone has a £325,000 nil-rate band, plus a residence nil-rate band of up to £175,000 when their home goes to children or grandchildren. Anything above the available bands is taxed at 40%, or 36% if 10% or more of the net estate goes to charity. A widow or widower can add the unused share of a late spouse's bands. Finance Act 2026 also froze the bands up to and including 2030/31, which ends on 5 April 2031.
What counts and what does not
Included from April 2027:
- unused defined contribution pots that can pay out death benefits;
- defined benefit lump sum death benefits that must, or can reasonably be expected to, be paid.
Left out:
- dependants' scheme pensions from defined benefit and collective defined contribution (CDC) schemes;
- death-in-service benefits paid only because the member was employed immediately before death;
- dependants' and nominees' annuities bought alongside a lifetime annuity;
- trivial commutation lump sums that end a dependants' scheme pension.
Pensions left to a spouse or civil partner, or to a charity, stay exempt, as other assets do.
What it costs
These examples come from our inheritance tax calculator, using the 2026/27 bands. In each one the home goes to children, and the widow has her late spouse's bands in full.
| Estate, including the home | Pension | Death before 6 April 2027 | On or after |
|---|---|---|---|
| Widowed, £900,000 with a £500,000 home | £400,000 | £0 | £120,000 |
| Single, £500,000 with a £300,000 home | £250,000 | £0 | £100,000 |
| Single, £1,900,000 with a £600,000 home | £300,000 | £560,000 | £720,000 |
In the first two cases the house and savings sit within the tax-free bands, so every pound of the new bill comes from the pension: 40% of everything above the bands.
The third case shows the hidden cost. The £300,000 pension takes the estate to £2,200,000. Above £2 million the residence band falls by £1 for every £2, so it drops from £175,000 to £75,000. The pension adds £160,000 to the bill, more than half its value.
The £2 million taper
The taper is worth checking even if your house and savings are well below £2 million. For a single person the residence band has gone completely by £2,350,000, and for a widow or widower with a full transfer of £350,000 it has gone by £2,700,000. Once pensions are part of the estate, a large pot can push an estate past those figures on its own.
Who pays, and how
The personal representatives, usually the executors, report and pay the tax, including the tax on pensions. To make that workable, they can tell pension schemes to hold back 50% of the benefits for up to 15 months. A beneficiary can also have the scheme pay the tax on their benefits directly to HMRC, if it comes to at least £1,000, subject to a 35-day time limit.
HMRC's regulations and guidance on the detail are still to come, so expect more on the process before April 2027.
Income tax on top after 75
If the member dies at 75 or over, whoever inherits the pension also pays income tax at their marginal rate on what they draw. From 6 April 2027 the taxable amount is reduced by the inheritance tax paid on it.
Here is £100,000 of pension where the rest of the estate already uses the tax-free bands, so the pension adds 40% inheritance tax.
| Member died | Inheritance tax | Income tax | Beneficiary keeps | Combined rate |
|---|---|---|---|---|
| Under 75 | £40,000 | £0 | £60,000 | 40% |
| 75 or over, beneficiary pays 20% | £40,000 | £12,000 | £48,000 | 52% |
| 75 or over, beneficiary pays 40% | £40,000 | £24,000 | £36,000 | 64% |
| 75 or over, beneficiary pays 45% | £40,000 | £27,000 | £33,000 | 67% |
If the member dies under 75, most benefits are income tax free up to the Lump Sum and Death Benefit Allowance of £1,073,100.
What to do now
- Add up your unused pension pots alongside your home, savings and investments, less any debts. If the total is above your tax-free bands, there may be inheritance tax to pay from April 2027.
- Check who would receive each pension. A spouse, civil partner or charity is exempt.
- If your estate including pensions is close to £2 million, work out how much residence band the taper would take away.
- Put your own figures into our inheritance tax calculator. It shows the bill before and after April 2027, how much of it comes from the pension, and the income tax a beneficiary would pay.