Pensions and Inheritance Tax: What Changes on 6 April 2027 and What to Review Now

For the past decade, pension savings have occupied an unusual and rather favourable corner of the tax system. Because most modern schemes pay death benefits at the discretion of their trustees, unused pension funds have generally sat outside the deceased's estate for inheritance tax purposes. That has made pensions an efficient way to pass wealth down a generation, and it has shaped a good deal of retirement planning advice.

From 6 April 2027, that changes. Most unused pension funds and pension death benefits will be counted as part of the estate when inheritance tax is calculated. If you have a substantial pension, or you expect to act as an executor for someone who does, this is the moment to understand what is coming and to check that your arrangements still make sense.

The pension inheritance tax change is now settled law

The change was announced at the Autumn Budget 2024 and consulted on through 2025. It is no longer a proposal. Finance Act 2026 received Royal Assent on 18 March 2026 and made the necessary amendments to the inheritance tax and pensions legislation.

What is still being finalised is the detail of how the process will work. The main information-sharing regulations, setting out what pension schemes and executors must tell each other and by when, were laid in July 2026. Two further sets of regulations are expected before April 2027, dealing with schemes that are split into sub-schemes and with the rules that determine when a full inheritance tax account has to be filed. HMRC has said it will publish full guidance, templates and online tools during spring 2027, and has so far issued two technical notes, the first in May 2026 and a second in August 2026, explaining how the new rules are expected to operate.

One important point of reassurance: the new rules apply to deaths on or after 6 April 2027. If someone dies before that date, the current treatment applies, even if the pension is not paid out until afterwards.

Who will pay more inheritance tax on pensions?

Most estates will still pay no inheritance tax at all. The government estimates that in 2027-28, around 10,500 estates out of roughly 213,000 with inheritable pension wealth will become liable to inheritance tax when they would not previously have done so, with a further 38,500 or so paying more than they otherwise would.

The thresholds are unchanged. The nil-rate band remains £325,000, and the residence nil-rate band adds up to a further £175,000 where a home passes to children or grandchildren. Both are frozen until April 2031. The residence nil-rate band tapers away once an estate exceeds £2 million, and this is where the change can bite hardest: adding a pension to the estate can push it over that line and reduce or remove an allowance that would otherwise have been available. With East Sussex house prices where they are, a family home plus a reasonable pension pot can reach that territory sooner than many people expect, which is why inheritance tax planning is no longer only a concern for the very wealthy.

What stays outside the estate?

Not everything is caught. The main exclusions are:

• Death in service benefits. These remain outside the estate. The exclusion is narrower than it sounds, though. It covers benefits paid because the member was employed or working immediately before death. A lump sum from a scheme connected to a former job, where the deceased was a deferred member, will not qualify.
• Dependants' scheme pensions, paid to a surviving spouse, civil partner, child or other dependant, whatever type of arrangement they come from.
• Joint life annuities, where the survivor's annuity was bought together with the member's own lifetime annuity.
• Charity lump sum death benefits.

Separately, the usual inheritance tax exemptions still apply. Anything passing to a surviving spouse or civil partner, or to a registered charity, remains exempt.

A warning for unmarried couples

That last point deserves emphasis, because it is where families are most often caught out. The exemption is for spouses and civil partners. It does not extend to long-term unmarried partners, however settled the relationship. A pension passing to a cohabiting partner does not benefit from the spouse or civil partner exemption, so it may contribute to an inheritance tax liability in circumstances where the same benefit passing to a spouse or civil partner would be exempt.

If you live with a partner and have not married or entered a civil partnership, this change makes it more important than ever to look at your pension nominations and your will together, and to understand what your partner would actually receive.

Inheritance tax and income tax on the same pension

Inheritance tax is not the only charge in play. Where the member dies aged 75 or over, pension death benefits will generally be subject to income tax in the hands of the beneficiary, with the precise treatment depending on the type of benefit. From 2027, both taxes can apply to the same fund.

The legislation does prevent genuine double taxation on the same money: the portion of the benefit used to pay inheritance tax is taken out of the beneficiary's taxable income. Even so, the combined effect is significant. On a fully taxable fund where the member died after 75, roughly 52% is lost where the beneficiary is a basic rate taxpayer, rising to around 64% for a higher rate taxpayer and around 67% for an additional rate taxpayer.

Those figures assume the whole fund is taxable and no exemption applies, so they represent the worst case rather than the typical one. But they explain why the timing and destination of pension benefits now warrant careful thought.

A heavier job for executors

The practical burden falls largely on personal representatives. They will need to identify every pension the deceased held, contact each scheme, obtain a date-of-death valuation, find out who the beneficiaries are, and report the lot to HMRC. Gathering that information does not always lead to a full inheritance tax account. Many estates will still qualify for the simplified reporting route, and the government has said it will amend the rules so that estates containing pension wealth can continue to do so, although the detail is still awaited. Schemes will have to respond within set timescales, and where a valuation cannot be produced within 28 days, they must provide an estimate and the basis for it.

Executors will also be dealing with pension schemes before the grant of probate has been issued, which means proving their identity and authority without the document schemes have traditionally relied on. Where there is no will, the Non-Contentious Probate Rules 1987 determine who has priority to apply, and a prospective personal representative in that queue can act. If you are weighing up whether to handle an estate yourself, our article on the hidden dangers of DIY probate is worth reading before April 2027 adds another layer to the job.

Liability is shared. Executors are responsible for reporting and paying, but once benefits have been allocated to a beneficiary, that beneficiary becomes jointly liable for the tax on their share. Schemes themselves can become liable if they ignore a valid notice.

Two mechanisms are designed to help. An executor who believes tax may be due can serve a withholding notice requiring a scheme to hold back up to half of a beneficiary's entitlement, for up to 15 months from the end of the month of death. And under the pensions direct payment scheme, executors or beneficiaries can instruct a scheme to pay the tax straight to HMRC from the fund. Withholding is meant for genuine cases, not as a routine precaution.

There is no soft landing on payment. Tax is due six months after the end of the month of death, with interest running after that. Pension funds cannot be paid for by instalments, and neither business nor agricultural property relief is available against them, so estates that are asset-rich but cash-poor need to plan for where the money will come from. Farming and business-owning families already grappling with the changes to business and agricultural property relief will want to factor pensions into the same conversation.

What to think about before April 2027

There is time, but not a great deal of it. Sensible steps include:

• Review your expression of wish or nomination form so the scheme knows who you intend to benefit, and check that it still reflects your circumstances. Nominations made years ago, before a marriage, divorce or new relationship, are a common problem.
• Revisit the assumption that a pension should be drawn last and everything else spent first. That logic no longer holds automatically.
• Consider gifting from income. Regular gifts out of surplus income remain exempt, and that exemption is unaffected by these changes, which makes drawing an income and gifting from it more attractive than it was. Our guide to when you pay inheritance tax on gifts explains the rules.
• Think about charity. If more than 10% of your net estate goes to charity, the reduced 36% rate can apply, and pension benefits paid to charity count towards that test.

Above all, wills and pension nominations need to be read together. It is quite possible for a pension to pass to one person while the tax bill lands on an estate left to somebody else, which is a recipe for delay and disagreement. If your will has not been reviewed in the last few years, this is a good reason to do it now.

Concerned about inheritance tax on your pension? Speak to our private client solicitors in Eastbourne, Bexhill-on-Sea and Hastings

Our inheritance tax planning solicitors can review how your estate is likely to be affected by the April 2027 changes, look at your will and pension nominations side by side, and set out the sensible options before the new rules take effect. The Private Client team includes members of the Society of Trust and Estate Practitioners (STEP) and works closely with clients' financial advisers where pension decisions are involved. If you are an executor facing an estate with pension wealth, our probate and estate administration team can take the reporting burden off your shoulders.

Call us on 01323 644222, email enquiries@stephenrimmer.com or book a free initial 30-minute consultation at our Eastbourne, Bexhill-on-Sea or Hastings office.

FAQs: Pensions and inheritance tax

Will my pension be subject to inheritance tax from April 2027?

For deaths on or after 6 April 2027, most unused pension funds and lump sum death benefits will be counted as part of your estate for inheritance tax. Death in service benefits, dependants' scheme pensions, joint life annuities and charity lump sums remain outside, and anything passing to a spouse, civil partner or registered charity is still exempt. Whether tax is actually payable depends on the size of your whole estate against the nil-rate bands.

Does the change apply if I die before 6 April 2027?

No. The new rules apply only to deaths on or after 6 April 2027. If someone dies before that date, the current treatment applies even if the pension is not paid out until after April 2027.

Can I avoid inheritance tax on my pension by leaving it to my partner?

Only if your partner is your spouse or civil partner. The exemption does not extend to unmarried partners, however long you have lived together. A pension passing to a cohabiting partner can contribute to an inheritance tax liability where the same benefit passing to a spouse or civil partner would be exempt, so unmarried couples should review their nominations and wills together.

Who pays the inheritance tax on a pension?

The executors or personal representatives are responsible for reporting and paying, but once benefits have been allocated, the beneficiary becomes jointly liable for the tax on their share. Executors can serve a withholding notice requiring the scheme to hold back up to half of a beneficiary's entitlement, or the scheme can be instructed to pay the tax directly to HMRC under the pensions direct payment scheme. Tax is due six months after the end of the month of death.

Disclaimer: The content of this website blog is for general awareness and insight. This is not legal or professional advice and readers should not act upon the information provided, they should seek professional advice based on their own particular circumstances. The law may have changed since this article was published.