Pension inheritance tax: the rules and the 2027 changes explained

Pension inheritance tax is worth understanding properly, because the rules today are quite different from what's coming in 2027, and mixing up inheritance tax with income tax is the most common mistake people make when researching this topic.

Most defined contribution (money purchase) pensions are held in trust by the scheme or provider, which means they don't legally form part of your estate when you die. Because of this, no inheritance tax is currently due on the pension pot itself, however large it's grown. Lump sum death benefits are also usually paid at the scheme's discretion rather than as of right, which is part of why they generally sit outside the inheritance tax net under current rules.

What beneficiaries may pay tax on instead is income tax when they draw money out of an inherited pension, which is a separate tax from inheritance tax and covered in detail further down this guide. Confusing the two is easy to do, but it matters, because "will inheritance tax be due?" and "will my beneficiaries pay income tax on withdrawals?" can have completely different answers for the same pension.

If you have a defined benefit (final salary or career average) pension, the position is slightly different again. These schemes typically pay a dependant's pension or a lump sum to your spouse, civil partner, or dependants under the scheme's own rules, rather than through your estate or your will, so the same broad principle applies: the money doesn't usually attract inheritance tax.

If you've built up pensions with more than one employer over the years, it's worth tracking them all down before you do any inheritance tax planning. Our guide to the best pension providers can help if you're trying to locate or consolidate older policies.

From 6 April 2027, most unused pension funds and pension death benefits will be brought inside the inheritance tax calculation for the first time. This is now confirmed law, following Royal Assent of the Finance Act 2026, and it reverses the long-standing principle that pensions sit outside your estate.

The change applies to deaths occurring on or after 6 April 2027. A few categories are excluded from the new rules, including dependants' scheme pensions, most death-in-service benefits, and certain annuities purchased for a surviving spouse or civil partner, but the majority of unused defined contribution pension pots will be affected.

In practice, pension scheme administrators may be able to withhold part of a death benefit for a period after death, to allow time for any inheritance tax position to be confirmed before the full amount is paid out to beneficiaries. This is a change from today, when most lump sum death benefits are simply paid out once the scheme has decided who should receive them.

The detailed process for reporting and paying tax on pensions was still being finalised through consultation at the time of writing, with further guidance and tools expected from HM Revenue and Customs ahead of April 2027. For the latest confirmed detail, see the government's technical note on inheritance tax on pensions and tax on a private pension you inherit.

Separately from inheritance tax, there's a second question that matters just as much to your beneficiaries: how much income tax will they pay when they actually draw money from an inherited pension? This depends heavily on how old you were when you died, and it applies whether or not the April 2027 inheritance tax changes end up affecting your estate.

This income tax treatment sits alongside, not instead of, the inheritance tax position covered above. It's entirely possible for a pension to sit outside your estate for inheritance tax purposes today, while your beneficiary still pays income tax on what they withdraw, particularly if you die aged 75 or over. From April 2027, some estates could face both inheritance tax on the pension value and income tax on withdrawals, so it's worth understanding both sides rather than just one.

The two-year window matters more than most people realise: if your personal representatives are slow to notify the pension provider of your death, or the provider takes too long to pay, a lump sum that would otherwise have been tax-free can become fully taxable simply because of the delay.

Married spouses and registered civil partners are generally in the strongest position when it comes to pension inheritance tax. Transfers between spouses and civil partners benefit from the same spousal exemption that applies to the rest of an estate, and this is expected to continue once pensions are brought into the inheritance tax calculation from April 2027, meaning a surviving spouse or civil partner shouldn't usually face an immediate inheritance tax bill on pension funds passed to them.

The position is very different for unmarried, cohabiting partners. There's no automatic spousal exemption for a cohabiting partner, whether or not the April 2027 changes end up applying to a particular estate. If you're not married or in a civil partnership, your partner also has no automatic right to inherit anything under intestacy rules, so an out-of-date or missing expression of wishes form could mean your pension provider pays benefits to a former partner, an estranged relative, or simply follows scheme discretion instead of your actual wishes.

Can my children inherit my pension? Yes - you can nominate children as beneficiaries alongside, or instead of, a partner. Providers generally follow a clear expression of wishes when deciding who receives death benefits, though it isn't usually a binding instruction in the way a will is.

There's no way to make pension inheritance tax disappear entirely once the April 2027 changes take effect, but there are legitimate planning options worth reviewing well before then. None of these guarantee a lower tax bill, and what's right for you depends on your wider estate, your health, and your family circumstances, so they're worth discussing with an advisor rather than acting on alone.

Pension inheritance tax rarely sits in isolation from the rest of your estate plan. Whether your pension ends up inside or outside your estate depends on the rules in force when you die, but it always interacts with your will, any secured debts, and the other tools people use to manage a future inheritance tax bill.

Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it, and any outstanding secured borrowing is deducted from your estate's value before inheritance tax is worked out. This matters if you're weighing up equity release and inheritance tax as a way to gift money to family now, since a lifetime mortgage is itself secured against your home and reduces what's left to inherit. Plans that meet Equity Release Council standards include safeguards such as a no negative equity guarantee, but the loan and any rolled-up interest still need to be weighed against the pension planning covered above.

Getting the rest of your estate plan in order alongside your pension is worth prioritising. Start with writing a will if you haven't already, since pensions usually pass by nomination rather than through your will, but the rest of your estate won't be distributed the way you intend without one. If you die without one in place, dying without a will means your estate is shared out under fixed intestacy rules, which can leave unmarried partners with no automatic entitlement at all.

A lasting power of attorney protects your finances if you're ever unable to manage them yourself, which is a separate but related part of planning ahead. Once probate is granted after death, your executor will need to account for pension death benefits alongside the rest of the estate when working out what, if anything, is due.

Some people also use life insurance in trust to cover a future inheritance tax bill without reducing their pension or other assets, since a policy written correctly in trust pays out alongside, rather than as part of, the estate. This wider view of estate planning tends to work better than looking at any single asset, including your pension, in isolation.

Because most pensions pass via nomination rather than through your will, your expression of wishes form is one of the most important documents in your entire estate plan, and it's often the most neglected. Providers generally treat it as a strong indication of your wishes rather than a binding instruction, so keeping it current and clear matters.

Whatever stage you're at, it's worth getting pension advice from a Financial Conduct Authority-regulated advisor before the April 2027 changes take effect, particularly if your estate is likely to be affected. If you'd like free, impartial guidance first, MoneyHelper (moneyhelper.org.uk, 0800 138 7777) is a good starting point alongside regulated advice.