TRW & Co · Pensions and private wealth
Inheritance Tax on Pensions from April 2027
From 6 April 2027, inheritance tax on pensions applies to most unused pension funds and death benefits, which will count as part of the estate. Personal representatives must report and pay the tax, death in service benefits are excluded and the spouse exemption still applies. This guide explains the rules, the new executor tools and the planning options worth considering now.
Key pointPersonal representatives, not pension schemes, are liable for the tax, yet they do not control the pension money. Withholding and direct payment notices are the tools that close that gap, so executors need to know about them from day one.
At a glance
Start date
Unused pension funds and death benefits come into the estate for deaths on or after 6 April 2027; earlier deaths are unaffected by the new rules.
Now in law
The provisions are in the Finance Act 2026, which received Royal Assent in March 2026, amending the Inheritance Tax Act 1984.
Executors are liable
Personal representatives must find, value, report and pay tax on pension benefits, even though the pension scheme holds and pays out the money.
Key exclusions
Death in service benefits, dependants' scheme pensions, charitable lump sums and benefits passing to a spouse or civil partner sit outside the charge.
Income tax too
Where the member dies aged 75 or over, beneficiaries usually also pay income tax on withdrawals, so the combined effect needs modelling.
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The short answer: inheritance tax on pensions from April 2027
From 6 April 2027, inheritance tax on pensions becomes part of ordinary estate planning. Most unused pension funds and pension death benefits will be added to the value of a person's estate when they die, and may be taxed alongside their home, savings and investments. Until then, most defined contribution pots sit outside the estate, which is why many people have treated their pension as the last asset to spend.
The change was announced at Autumn Budget 2024 and is now law. The provisions are in the Finance Act 2026, which received Royal Assent in March 2026. HMRC's policy paper on unused pension funds and death benefits confirms the start date and that personal representatives, not pension schemes, will be liable to report and pay any tax due.
Three points matter most. First, the standard nil-rate band and the spouse and civil partner exemption still apply, so many estates will pay nothing extra. Second, death in service benefits from registered schemes are excluded. Third, the people who administer an estate now carry real responsibility for finding and valuing pension benefits they do not control.
Who should read this
This guide is for people with sizeable defined contribution pensions, their families, and anyone likely to act as an executor. It also matters to business owners whose pension has been the core of their retirement and succession plan. It covers England and Wales; inheritance tax applies across the UK, but succession law and estate administration differ in Scotland and Northern Ireland.
What changes in April 2027
At present, most money purchase pension pots held under discretionary scheme rules are not part of the estate for inheritance tax. The scheme administrator decides who receives the death benefit, usually guided by an expression of wish, and the funds pass without inheritance tax.
From 6 April 2027 that shelter largely ends. For money purchase arrangements, the whole of any unused fund is brought into the estate. For defined benefit schemes, lump sum death benefits that are not excluded are brought in. Deaths before 6 April 2027 are not affected, whatever the date of the claim or payment.
The value added to the estate is then taxed in the usual way. The current nil-rate band is £325,000 and the standard rate above it is 40%, as HMRC's inheritance tax guidance explains. The residence nil-rate band may add further relief where a home passes to direct descendants, but it tapers away for larger estates, and adding a pension fund to the estate value can reduce or remove it.
What is excluded
The Finance Act 2026 leaves several benefits outside the new charge. Based on the published legislation and commentary on it, these include:
- death in service benefits payable from a registered pension scheme;
- dependants' scheme pensions, and trivial commutation lump sums that extinguish a dependant's entitlement;
- dependants' or nominees' annuities bought with a member's lifetime annuity;
- charitable lump sum death benefits; and
- anything passing to a surviving spouse or civil partner, which is covered by the spouse exemption.
The spouse exemption is valuable but often only defers the tax. If the survivor does not spend the fund, it may be taxed on their own death, so planning should look at both deaths together.
The legal framework and who is liable
The core rules sit in the Inheritance Tax Act 1984, as amended by the Finance Act 2026. The 2026 Act adds provisions on tax charged on certain pension interests, on liability for that tax, and on the withholding of benefits and payment of tax by scheme administrators.
HMRC originally consulted on making pension scheme administrators responsible for paying the tax. After the technical consultation on liability, reporting and payment, it changed course. Personal representatives are now liable to report and pay inheritance tax on pensions, in the same way as they do for the rest of the estate.
The role of personal representatives
Executors and administrators must now identify every pension the deceased held, obtain valuations from each scheme, include them in the estate account and pay the tax. They may not control the pension money, which is held by the scheme and paid to beneficiaries chosen under its rules.
To bridge that gap, the legislation gives personal representatives two tools. A withholding notice tells a scheme that tax may be due and restricts payment while it has effect. A direct payment notice requires the scheme to pay tax straight to HMRC from the pension fund. Both are explained below.
HMRC clearance gives important comfort. Commentary on the Act confirms that a clearance certificate protects personal representatives against liability for pensions discovered later, unless the non-disclosure was due to carelessness. That makes a careful search for pensions worth the effort, not a box-ticking exercise. Our guide to executor duties sets out the wider obligations.
Income tax on top
Inheritance tax is not the only charge. Where a member dies aged 75 or over, beneficiaries usually pay income tax at their marginal rate on what they draw from an inherited pension. Families should model the combined effect of inheritance tax on pensions and income tax before deciding how to draw or nominate benefits.
How inheritance tax on pensions works in practice
The process will feel familiar to anyone who has administered an estate, with extra steps for the pension. Inheritance tax is generally due by the end of the sixth month after the month of death, and interest runs after that, so the timetable is tight when several schemes are involved.
- Find every pension. Search paperwork, bank statements and online accounts, and use the government's pension tracing service for older arrangements. Include workplace, personal, self-invested and overseas schemes.
- Notify each scheme. Tell each administrator about the death and ask for the value of unused funds and any death benefits, and whether any element is excluded.
- Consider a withholding notice. If tax may be due, notify the scheme so that it holds back part of the benefits. Under the published rules a notice can last up to 15 months after the end of the month of death and limits payments while it has effect.
- Value the whole estate. Add the pension values to the other assets, apply exemptions and reliefs, and work out how the nil-rate bands are shared between pension and non-pension assets.
- Agree who pays. Where the beneficiary of the pension owes a share of the tax, decide whether to use a direct payment notice. Commentary on the Act indicates a minimum of £1,000 of tax and that the scheme must pay within 35 days of receiving the notice.
- File and pay. Submit the inheritance tax account and payment, then apply for clearance once the figures are final.
- Release the benefits. Once tax is settled, the scheme pays the remaining death benefits to the chosen beneficiaries, who then deal with any income tax.
Expression of wish forms decide who receives the pension, but your will decides who receives the rest of the estate. After April 2027 the two interact: the pension uses up part of the nil-rate band, which can leave less relief for the people named in your will. Review both documents together, ideally with the help of our wills and estate planning team.
Planning options compared
There is no single right answer. The best approach depends on age, health, other assets, the income needs of a surviving spouse and the tax position of the next generation. The table compares the main levers.
| Option | How it helps | Watch-outs |
|---|---|---|
| Nominate a spouse or civil partner | Spouse exemption applies on first death; fund stays invested | May only defer tax to second death; review survivor's own plan |
| Draw pension income and spend it | Reduces the fund that will be in the estate | Income tax on withdrawals; risk of running short in later life |
| Regular gifts from surplus income | Gifts out of normal expenditure can be immediately exempt | Must be regular, from income and leave living standards intact; keep records |
| Lifetime gifts of capital | Fall outside the estate if the donor survives seven years | Tapered relief only after year three; see our seven-year rule guide |
| Life cover written in trust | Provides cash to pay the tax without forming part of the estate | Premium cost and underwriting; trust must be set up correctly |
| Charitable nomination | Charitable lump sum death benefits are excluded | Only suits those with genuine charitable intentions |
These measures sit within a wider plan. Our guide to inheritance tax planning covers trusts, the residence nil-rate band and reliefs in more depth. Business owners should also note separate reforms to business property relief, which may change how much of a family company passes free of tax.
An illustrative scenario
The following example is illustrative only and uses generic parties. A widower in his late seventies owns a London flat, investments and a large self-invested personal pension. He has always drawn only modest income from the pension, intending it to pass to his two adult children free of inheritance tax.
Under the current rules, that strategy works. If he dies after 6 April 2027, the pension joins the estate. The combined value exceeds his available nil-rate bands, and the residence nil-rate band may be reduced because the estate is large. Because he is over 75, his children will also pay income tax on what they draw from the inherited pension.
His adviser team reviews three options: drawing more income each year and making regular gifts from it, buying life cover in trust to fund the expected tax, and updating his will so the burden of tax falls where he intends. His executors are also briefed on withholding and direct payment notices, so they can control the cash flow when the time comes. None of this removes tax entirely, but it replaces an unplanned bill with a managed one.
Risks and common mistakes
Assuming the pension is still outside the estate
Many people built their retirement strategy around the old rule that pensions pass free of inheritance tax. For deaths on or after 6 April 2027, that assumption is wrong for most unused funds. Plans made on the old basis, such as spending other assets first to preserve the pension, may now increase the tax bill.
Revisit the order in which you draw on assets with your financial adviser and take legal advice on how the changes interact with your will.
Executors missing a pension
Personal representatives are liable for tax on pensions, but they may not know every scheme the deceased held. Old workplace pensions and small personal pots are easy to overlook. A pension found after the estate has been settled can lead to a further tax bill and interest.
Keep an up-to-date list of pensions with your will. Executors should search thoroughly and seek HMRC clearance once the account is final; clearance gives protection unless the omission was careless.
Distributing the estate too early
If executors pay out the rest of the estate before the pension values and tax are known, they may be left without funds to meet tax due on the pension element. They can then face personal exposure or difficult recovery claims against beneficiaries.
Hold back a reserve, use a withholding notice where tax may be due, and agree in writing how the tax will be borne between pension beneficiaries and residuary beneficiaries.
Out-of-date nominations
Expression of wish forms are often completed once and forgotten. After divorce, remarriage or the birth of grandchildren they may point to the wrong people, and they may no longer match the will. Since the pension now uses part of the nil-rate band, mismatches can distort the whole estate.
Review nominations alongside your will whenever circumstances change, and record the reasons behind them so the scheme administrator understands your intentions.
Cross-border and international families
Inheritance tax on pensions follows the general UK rules on who is within the charge. Since April 2025, liability for long-term residents is based on residence rather than domicile; see our note on the new residence-based regime. Families who have moved to or from the UK should check how those rules apply to them before assuming a pension is outside the scope of UK tax.
Overseas pension arrangements, including qualifying recognised overseas pension schemes, raise their own questions about valuation, reporting and who can pay. Where a family also owns property or savings in Bangladesh, the estate may need advice in both jurisdictions; our guide to UK inheritance tax and Bangladesh assets explains the overlap.
What to do now: a checklist
With the change taking effect in April 2027, there is still time to plan, but decisions on gifts, drawdown and insurance take time to implement.
- List every pension, with scheme names, policy numbers and current values.
- Ask each scheme whether any benefits are excluded, such as death in service.
- Estimate the estate with pensions included and check the impact on the residence nil-rate band.
- Review expression of wish forms and your will together.
- Consider regular gifts from surplus income and keep a clear record.
- Discuss life cover in trust if a tax bill is likely.
- Brief your executors on withholding and direct payment notices.
TRW & Co's London office is authorised and regulated by the Solicitors Regulation Authority. We advise on wills, estates and the legal side of pension planning, working alongside our pensions team and your financial adviser. To discuss how inheritance tax on pensions affects your plans, contact us at info@trw.co or +880 1779 127165, or visit us at Holborn Gate, 330 High Holborn, London WC1V 7QH.
Frequently asked questions
01When does inheritance tax on pensions start?
The new rules apply to deaths on or after 6 April 2027. From that date most unused pension funds and pension death benefits are included in the value of the deceased person's estate. Deaths before 6 April 2027 are dealt with under the old rules, so most defined contribution pots will remain outside the estate in those cases. The measure was announced at Autumn Budget 2024 and is contained in the Finance Act 2026, which received Royal Assent in March 2026.
02Are death in service benefits subject to inheritance tax?
No. HMRC has confirmed that all death in service benefits payable from a registered pension scheme are excluded from the value of an estate for inheritance tax from 6 April 2027. Dependants' scheme pensions and charitable lump sum death benefits are also excluded. Life cover provided outside a pension scheme is a separate question: whether it forms part of the estate depends on how the policy is owned and whether it has been written in trust, so it is worth checking the policy terms.
03Who pays inheritance tax on a pension?
Personal representatives are liable to report and pay inheritance tax on unused pension funds and death benefits, as they are for the rest of the estate. Because the pension money is held by the scheme, the legislation lets a personal representative or beneficiary require the scheme administrator to pay tax directly to HMRC from the fund, and lets personal representatives issue a withholding notice that limits payments while the tax position is worked out. How the tax burden is shared between beneficiaries depends on the will and the general law.
04Does the spouse exemption still apply to pensions?
Yes. Pension benefits that pass to a surviving spouse or civil partner benefit from the spouse exemption, so there is normally no inheritance tax on the first death. The fund may, however, be taxed when the survivor dies if it has not been spent or passed on in a tax-efficient way. Planning should therefore look at both deaths together, including the survivor's own income needs and any unused nil-rate bands that may transfer.
05Will my children pay income tax as well as inheritance tax?
They may. Where the pension member dies aged 75 or over, beneficiaries usually pay income tax at their marginal rate on money they draw from an inherited pension. From April 2027 the fund may also have been reduced by inheritance tax. The combined effect can be significant, so families should model both taxes before deciding how benefits are nominated and drawn.
06What can I do now to reduce inheritance tax on my pension?
Options include reviewing who you nominate, drawing and spending more of the pension during your lifetime, making regular gifts from surplus income, making lifetime gifts that may fall outside the estate after seven years, taking out life cover written in trust to fund the tax, and considering charitable nominations. Each has trade-offs, especially income tax on withdrawals and the risk of running short in later life. Take joint legal and financial advice before acting.
Sources and official materials
- Finance Act 2026 — Legislation bringing pension interests into inheritance tax
- Reforming Inheritance Tax: unused pension funds and death benefits — HMRC policy paper confirming scope and start date
- Inheritance Tax on pensions: liability, reporting and payment — HMRC technical consultation and response
- Inheritance Tax (GOV.UK) — Thresholds, rates, exemptions and payment
- Inheritance Tax Act 1984 — Principal inheritance tax legislation
General information only, current as at 21 October 2026. It is not legal advice and does not create a solicitor–client relationship. It reflects the law of England and Wales unless stated otherwise; Scotland and Northern Ireland have separate legal systems, and the law changes frequently. Check current official sources and take advice on the facts of your matter.