Inheritance Tax on Pensions: What the April 2027 changes mean for you

For decades, pensions have sat outside the estate for Inheritance Tax (IHT) purposes, making them one of the most efficient ways to pass on wealth to the next generation. However, from 6^th April 2027, that is set to change. Most unused pension funds and pension death benefits will be brought within the value of a person’s estate for IHT purposes, following legislation confirmed in the Finance Act 2026, which received Royal Assent on 18^th March 2026.

If you hold a pension you intend to leave to loved ones, this is a significant shift in the rules and one that requires action well before the deadline. Here’s what’s changing, who it affects, and what you should be doing now.

What’s changing?

Currently, most defined contribution pension pots and pension death benefits fall outside the deceased’s estate for IHT purposes, largely because of the discretionary way scheme trustees or administrators decide who receives the benefit. This has made pensions an attractive tool not just for retirement income, but for tax-efficient intergenerational wealth transfer.

From 6^th April 2027, that will no longer be the case. Under the new rules:

• Most unused pension funds (uncrystallised or residual funds not yet drawn down or annuitised) and pension death benefits will be included in the value of the deceased’s estate for IHT purposes.
• This applies regardless of whether the scheme administrator or trustees retain discretion over who the benefit is paid to.
• The change applies only where the member dies on or after 6^th April 2027. Deaths before that date will be dealt with under the current rules, even if the pension is actually paid out afterwards.

IHT is charged at 40% on the value of an estate above the available nil-rate bands (currently £325,000, plus the residence nil-rate band of £175,000 where applicable), so for larger estates the impact could be substantial.

What’s excluded from the changes to IHT on pensions?

Not everything pension-related is being pulled into scope. Based on the legislation and HMRC’s technical guidance, the following remain outside the changes:

• Death-in-service benefits paid from registered pension schemes are specifically excluded and will not form part of the estate.
• Dependants’ scheme pensions are also excluded.
• Benefits passing to a surviving spouse or civil partner (where they are a long-term UK resident) continue to benefit from the existing spousal exemption.
• Benefits passing to a registered charity remain exempt.
• Nominees’ annuities are treated as continuing income rather than a transfer of wealth, and so fall outside the new rules.

Who becomes responsible for the tax?

This is where the changes create real practical complexity. Responsibility for reporting and paying any IHT due on pension funds and death benefits will sit with the personal representatives (PRs) of the estate, not the pension scheme administrator.

In practice, this means:

• PRs will need to identify, value and report pension assets, potentially across multiple providers, as part of the wider estate.
• Pension scheme administrators will have new duties to provide PRs with information on the value of unused funds and death benefits within a set timeframe of being notified of the death.
• A new Pensions Direct Payment Scheme is being introduced, allowing PRs to instruct scheme administrators to pay the IHT due directly to HMRC before releasing the remaining benefit to beneficiaries.
• Alternatively, PRs (or beneficiaries) can arrange for the beneficiaries to pay the IHT themselves, provided this is agreed with the PR.
• Where PRs reasonably expect IHT to be due, they can direct the scheme administrator to withhold 50% of the taxable benefit for up to 15 months from the end of the month of death, to ensure funds are available to settle the liability.
• Once a valid payment notice is received, scheme administrators must pay the tax to HMRC within 35 days.

For families dealing with multiple pension pots, and for executors unfamiliar with pension valuations, this adds a meaningful administrative burden to what is already a difficult time.

Why have the changes to IHT on pensions been introduced?

According to HMRC’s policy documents, the reform is intended to remove the “distortions” that have led to pensions being increasingly marketed and used as a tax planning vehicle for passing on wealth, rather than for their original purpose of funding retirement. It also aims to iron out inconsistencies in how different types of pension arrangements are currently treated for IHT.

What should you be doing now?

Although the changes don’t take effect until April 2027, there is a lot that can be reviewed now in preparation:

1. Review your nominated beneficiaries. If you plan to leave your pension to someone other than a spouse or civil partner, the IHT position will change materially, and your existing nomination may no longer reflect the most tax-efficient outcome.
2. Reassess your overall estate planning. Pensions may no longer be the most efficient asset to leave until last. Depending on your circumstances, it may make sense to revisit the order in which you draw down pensions versus other savings and investments during retirement.
3. Model the potential IHT exposure. Bringing pension funds into the estate could push some estates over the nil-rate band thresholds for the first time, or increase existing liabilities significantly.
4. Consider lifetime gifting and trust planning, where appropriate, as part of a wider review, though any such planning should be considered carefully in light of your personal circumstances and other IHT rules.
5. Talk to us before the rules change. Every estate is different, and the right approach will depend on the size of your pension savings, your wider estate, your family circumstances and your objectives for beneficiaries. Our tax planning experts will work with you and your financial adviser to build a plan best suited for your personal situation.

This is a complex area of legislation, and secondary regulations and HMRC guidance are still being finalised ahead of the April 2027 start date.

If you hold significant pension savings, or you’re an executor managing an estate that includes pension assets, please get in touch. We can review your position, model the likely impact of the changes, and help you plan ahead with confidence. Call us on 01905 777600 or email hello@ormerodrutter.co.uk for more information.

The information in this post is accurate as of its publication date and may become outdated over time. This content is provided for general informational purposes only and should not be considered technical advice. If you have any questions or need guidance specific to your situation, please get in touch with our team.