Inheritance Tax and Pensions: What Happens to Your Pension When You Die?

Pensions can be one of the largest assets a person leaves behind — yet for many years, unused pension funds could often pass to beneficiaries without forming part of the estate for Inheritance Tax purposes. That is changing significantly from 6 April 2027.

From that date, most unused pension funds and certain pension death benefits will generally be brought within the value of the deceased person’s estate for Inheritance Tax purposes. For anyone with significant pension savings, this is one of the most important estate planning changes in a generation.

This guide explains what happens to a pension when someone dies, how Inheritance Tax applies, what the April 2027 changes mean in practice, and what families should consider when planning ahead.

Important

This article is for general educational purposes and is not personal tax, financial or legal advice. Pension and Inheritance Tax rules can be complex and may depend on the type of pension, the circumstances of the death and the beneficiary. Consider professional advice for your individual situation.

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Quick answer: are pensions subject to Inheritance Tax?

The answer depends on when the person dies and the type of pension involved.

When	IHT treatment of most unused pension funds
Before 6 April 2027	Many unused pension funds in discretionary arrangements can normally pass outside the estate for IHT purposes
From 6 April 2027	Most unused pension funds and pension death benefits will generally be included in the estate for IHT purposes (some exclusions apply)

What happens to your pension when you die?

When someone dies, what happens to their pension depends on the type of pension they have and whether they had already started taking benefits.

Defined contribution pensions

A defined contribution pension has a pot of money invested for retirement. If the pension holder dies with money remaining, the pension provider may be able to pay benefits to nominated beneficiaries. The exact options depend on the pension scheme rules and the circumstances of the death.

Defined benefit pensions

A defined benefit pension works differently — instead of an investment pot, the pension provides an income based on factors such as salary and length of service. Some schemes may provide a pension to a surviving spouse, civil partner or dependant after the member dies. The rules can therefore be very different from those applying to a personal pension pot.

What happens to a pension if you die before age 75?

Age matters because pension death benefits can be subject to different Income Tax rules depending on whether the person dies before or after age 75.

Under current pension tax rules, certain lump-sum death benefits paid from a registered pension scheme can generally be paid without Income Tax where the member dies before age 75, subject to the relevant rules and allowances.

Income Tax vs Inheritance Tax — an important distinction

These are two separate taxes. A pension could potentially have different consequences for Income Tax (charged on the beneficiary when they receive money) and Inheritance Tax (charged on the estate at death). Simply saying a pension is “tax-free” or “taxed” can be misleading — it depends on which tax you mean.

What happens if you die after age 75?

If someone dies after age 75, pension benefits inherited by beneficiaries can generally be subject to Income Tax when the beneficiary receives them. This is separate from the question of whether the pension is included within the estate for Inheritance Tax purposes — a distinction that becomes particularly important from April 2027.

What is changing in April 2027?

One of the biggest changes to UK Inheritance Tax planning is due to take effect on 6 April 2027.

From that date, most unused pension funds and pension death benefits will be brought within the value of a person’s estate for Inheritance Tax purposes. The government legislated for these changes through the Finance Act 2026. They apply to deaths occurring on or after 6 April 2027.

The government says the reform is intended to remove an incentive to use pensions primarily as a vehicle for passing wealth to beneficiaries rather than for funding retirement.

Are there exclusions?

Yes. The new rules are not a blanket “all pensions are taxed at 40%”. Important exclusions include:

Death-in-service benefits payable from registered pension schemes will remain outside the estate for IHT purposes
Other specific exclusions and special rules apply depending on the pension arrangement

This is why pension planning should be based on the actual pension arrangement rather than assuming every pension receives identical treatment.

How does the pension interact with the Inheritance Tax allowance?

For the 2026/27 tax year, the standard Inheritance Tax Nil Rate Band is £325,000, with a Residence Nil Rate Band of up to an additional £175,000 where the relevant conditions are met.

From April 2027, where an unused pension is brought within the estate, it increases the value of the estate being assessed for Inheritance Tax, potentially consuming more of — or exceeding — the available allowances.

The inheritance tax estimate guide explains how to gather property, savings, gifts and pension figures, while the calculator can model your current estate position.

Simple example (deaths after 6 April 2027)

Home and other assets	£500,000
Unused pension funds (now in estate from April 2027)	£400,000
Total relevant estate	£900,000

This is a simplified illustration. The actual tax position would depend on the person’s available Nil Rate Band, Residence Nil Rate Band, spouse or civil partner exemptions, gifts, reliefs and other circumstances.

Could pensions push an estate into Inheritance Tax?

Yes — and this is one of the most important implications of the April 2027 changes.

Consider someone with £300,000 of property and other assets alongside £400,000 of unused pension funds. Without the pension in scope, they might appear to have little exposure to Inheritance Tax. Once the pension is brought into the estate under the new rules, the overall value could be substantially higher.

The government estimates that in 2027/28, around 10,500 estates could become liable for Inheritance Tax where they otherwise would not have been, while around 38,500 estates could pay more Inheritance Tax because of the pension reforms.

A fuller example of why pension planning matters

Scenario — deaths after 6 April 2027

Home	£650,000
Savings & investments	£200,000
Pension (unused) (in estate from April 2027)	£500,000
Total	£1,350,000

The family cannot simply look at the £850,000 of property, savings and investments and ignore the pension. The actual Inheritance Tax calculation would then need to consider the available allowances, exemptions, reliefs, previous gifts and other relevant factors.

What should you do with your pension before April 2027?

The upcoming changes do not mean that everyone should immediately withdraw money from their pension. Making major decisions purely to avoid Inheritance Tax could create other tax, investment or retirement-planning consequences. Instead, consider a structured review.

Understand how much you have

List all pension arrangements: personal pensions, workplace pensions, defined contribution pensions, defined benefit pensions, SIPPs and any other pension arrangements you may have accumulated over your career.

Check your beneficiary nominations

Make sure your pension provider has your intended beneficiaries recorded and up to date. Nominations remain important even though they no longer determine IHT treatment.

Understand your wider estate

Don’t look at your pension in isolation. Consider property, savings, investments, businesses, life insurance, gifts and all other valuable assets together.

Review your Inheritance Tax position

Your potential IHT exposure may change significantly when pensions are included. Use a calculator or seek professional advice to understand the full picture.

Don’t make major decisions without considering wider consequences

Withdrawing a pension, giving money away or changing investments can have consequences beyond Inheritance Tax — Income Tax, investment risk and retirement security all need to be weighed. Professional advice can be particularly important for larger or more complex estates.

Is it better to spend your pension rather than leave it?

There is no universal answer. The April 2027 changes may make some people reconsider how they use their pension, but spending a pension early is not automatically the best strategy. Your pension is primarily intended to support you during retirement.

A decision to withdraw funds should weigh factors including:

Your retirement income needs and expected lifespan
Investment growth potential inside the pension
Income Tax on withdrawals
Inheritance Tax on the residual pension
Your other assets and wider estate objectives
Investment risk and your beneficiaries’ needs

A decision that reduces potential Inheritance Tax could still leave you financially worse off if it unnecessarily reduces your retirement security. This is one of the areas where individual professional advice can be particularly valuable.

Pension planning and the seven-year rule

The seven-year rule is an important part of inheritance planning generally, but it should not be confused with the new pension rules. Certain gifts made during a person’s lifetime can become exempt from Inheritance Tax if the person survives seven years after making the gift.

If you are considering using pension withdrawals to make gifts, you need to consider both the pension tax consequences of the withdrawal and the Inheritance Tax consequences of the gift. For more information, see our guide to the Seven-Year Rule and Lifetime Gifts.

What about married couples and civil partners?

Spouse and civil partner exemptions can be important when calculating Inheritance Tax. Unused portions of the Nil Rate Band and Residence Nil Rate Band may also potentially be transferred to a surviving spouse or civil partner where the relevant conditions are met.

For qualifying estates, the combined Nil Rate Band and Residence Nil Rate Band can potentially reach £1 million — although the exact position depends on the circumstances. Pension assets should therefore be considered as part of the couple’s overall estate plan, rather than looking at each pension separately.

Why pension nominations are still important

Even though pension nominations no longer necessarily determine the Inheritance Tax treatment from April 2027, keeping beneficiary nominations up to date remains an important part of estate planning. You should review nominations after:

Marriage or divorce
Separation or change in relationship
The birth of a child or grandchild
The death of a previously named beneficiary
Significant changes in financial circumstances
Changes to your pension arrangements

How will Inheritance Tax on pensions be reported from April 2027?

From 6 April 2027, personal representatives will generally be responsible for reporting and paying any Inheritance Tax due on unused pension funds and pension death benefits that fall within the new rules.

The government has introduced mechanisms to help personal representatives deal with situations where tax is due on pension assets but the estate does not have enough readily available cash. Personal representatives who reasonably expect IHT to be due can direct pension scheme administrators to withhold part of the taxable benefits and, in certain circumstances, pay the tax to HMRC before releasing the remaining benefits. HMRC is continuing to develop guidance and supporting tools ahead of implementation.

Common pension and Inheritance Tax mistakes

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Assuming pensions are always outside Inheritance Tax

This is becoming increasingly outdated. The rules change significantly from 6 April 2027.

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Confusing Income Tax with Inheritance Tax

The age of the deceased affects Income Tax on pension death benefits. IHT is a separate calculation entirely.

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Forgetting old pensions

People often accumulate several pension arrangements over their working lives. An old workplace pension can be easy to overlook, but it still forms part of your estate.

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Not updating beneficiary nominations

An outdated nomination can create unnecessary complications and may not reflect your current wishes.

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Making large withdrawals purely to avoid Inheritance Tax

This can create other tax and retirement-planning problems. Income Tax on withdrawals can be significant.

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Looking only at the family home

Savings, investments and — from April 2027 — most unused pension funds may all be relevant. The estate is more than property.

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Waiting until retirement to think about estate planning

The earlier you understand your assets and potential tax position, the more options you are likely to have.

Frequently Asked Questions

Are pensions currently subject to Inheritance Tax?

Some pension benefits can already be relevant for Inheritance Tax, but many unused pension funds in discretionary arrangements have historically been outside the estate. The rules change significantly from 6 April 2027.

Will pensions be subject to Inheritance Tax from April 2027?

Most unused pension funds and pension death benefits will generally be included within the estate for Inheritance Tax purposes for deaths on or after 6 April 2027. Important exclusions apply — for example, registered pension scheme death-in-service benefits remain outside the estate.

Does a pension count towards the £325,000 Inheritance Tax allowance?

From April 2027, where pension funds fall within the estate under the new rules, their value can contribute to the overall estate being assessed against the available Inheritance Tax allowances, including the Nil Rate Band and Residence Nil Rate Band.

Is a pension inherited before age 75 tax-free?

Certain pension death benefits can generally be paid without Income Tax where the member dies before age 75, subject to the relevant rules. This is an Income Tax point — it is separate from the Inheritance Tax treatment of the pension under the new rules from April 2027.

Is a pension inherited after age 75 taxable?

Pension benefits inherited after the member dies aged 75 or over can generally be subject to Income Tax when received by the beneficiary, depending on the circumstances and how the benefits are taken.

Should I withdraw my pension before April 2027?

Not necessarily. The decision should consider retirement needs, Income Tax on withdrawals, Inheritance Tax, investment growth and your wider financial circumstances. Making pension decisions solely to minimise Inheritance Tax could create other problems. Professional advice is recommended for significant amounts.

Does the seven-year rule apply to pensions?

The seven-year rule relates primarily to certain lifetime gifts and is separate from the rules governing pension death benefits. If pension withdrawals are used to make gifts, the gift itself may have its own Inheritance Tax implications under the usual gifting rules.

Will every pension be included in my estate from April 2027?

No. The April 2027 reforms contain exclusions and special rules. Registered pension scheme death-in-service benefits are excluded from the estate for Inheritance Tax purposes, and other specific rules also apply. The treatment depends on the type of pension and arrangement.

What the April 2027 pension changes mean for families

The most important takeaway is this: your pension may become a much more significant part of your Inheritance Tax calculation.

From 6 April 2027, most unused pension funds and pension death benefits will generally be brought within the estate for Inheritance Tax purposes. That doesn’t mean every pension will generate an Inheritance Tax bill — it means that families should no longer automatically assume a pension can be ignored when considering the potential value of an estate.

For anyone with significant pension savings, particularly alongside a valuable property and other investments, reviewing the overall estate plan before the new rules take effect is a sensible step.

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Sources and further reading

The rules described above are based primarily on current HMRC and GOV.UK guidance and legislation. HMRC is continuing to publish further guidance and supporting material ahead of the April 2027 implementation.

GOV.UK — Inheritance Tax on pensions: technical note
GOV.UK — Inheritance Tax: unused pension funds and death benefits
GOV.UK — Inheritance Tax thresholds and interest rates
HMRC Inheritance Tax Manual — Pensions and death benefits

Disclaimer

This article is for general information purposes only and does not constitute financial, tax or legal advice. Pension and Inheritance Tax rules are complex and subject to change. Individual circumstances vary significantly. Always seek qualified professional advice before making decisions about pensions, estate planning or Inheritance Tax. Last reviewed August 2026.