What’s changing and why does it matter?

Here’s what you need to know about the new Inheritance Tax (IHT) changes on pensions, coming into force on 6 April 2027, and what you should consider doing before these are implemented.

So what’s changed?

From 6 April 2027, most unused pension funds and pension death benefits will be included in a person’s estate for IHT calculation purposes. This applies regardless of whether the pension scheme is discretionary or non‑discretionary. However, transfers to a surviving spouse or civil partner and to charities will generally remain exempt along with death‑in‑service benefits payable from registered pension schemes.

The executor (personal representative) will now be responsible for reporting and paying any IHT due on these pension assets with pension providers supporting this process. They must provide values within four weeks and offer a Pension Inheritance Tax Payment Scheme and declaring any IHT includes a administrative task, which could attract penalties of between £100 and £3,200, if delayed or incomplete.

Why is the government making this change?

The government’s stated reasons are to ensure pensions are used primarily to fund retirement, rather than as an inheritance tax planning tool; to make the tax treatment of different pension arrangements more consistent; and to raise additional tax revenue.

Why it matters

Previously, pensions were largely excluded from estate valuations, making them a popular way to pass wealth tax efficiently. Now, pensions included in the estate for inheritance tax purposes are treated like other assets. For many people, it won’t make any difference because either they leave assets to a spouse or civil partner, their estate remains below the IHT threshold, or they spend most of their pension during retirement.

However, the government estimates that, of around 213,000 estates with inheritable pension wealth in 2027 to 2028, 10,500 estates will have an Inheritance Tax liability where previously they would not. This means approximately 38,500 estates will pay more Inheritance Tax than would previously have been the case. In some cases, combined with income tax on pension withdrawals (for deaths after age 75), beneficiaries could face an effective tax rate as high as 67%. 

So if you have a large defined contribution pension or other valuable assets (such as property and investments) and/or were planning to preserve your pension while spending other savings first to minimise IHT, it could matter to you.

Nil-rate band (NRB) and residence nil-rate band (RNRB) 

Where inheritance tax planning becomes far more important, is the interaction between the nil-rate band (NRB) and the residence nil-rate band (RNRB), and the 2027 pension changes. 

As pension savings are generally outside your estate, they currently don’t use up any of your NRB or RNRB. However, from April 2027, unused pension funds will generally be included when calculating the value of your estate. They don’t get a separate allowance, they simply become another asset competing for the same £325,000 and (if applicable) £175,000 allowances.

What should you do in response?

Review your estate and pension plans as soon as possible. A financial adviser will help by reviewing pension holdings alongside other assets – especially if you expect to pass your wealth on to your children or grandchildren – as anything related to taxation can change at any time and rules are always dependent on your specific circumstances.

Giving lifetime gifts outside of the seven year rule, which applies to any significant lifetime gifts of property, money, investments, personal possessions, land, or business interests. Exemptions from this rule that could remove assets from your estate and reduce any IHT, are the annual allowance, small gifts, wedding gifts, gifts out of income, and gifts to spouse/charities.

Setting up a power of attorney and gathering your pension and other documentation together; this ensures your executor will know how to access this information.

Keeping your will up to date to ensure your estate and tax planning goals are understood on your death.

If you have substantial assets, or are concerned about inheritance for those you leave behind, the change in pension IHT applies to deaths on or after 6 April 2027, so planning now gives you the best opportunity to act. If you’d like some sound, sensitive advice on estate planning, do get in touch with us for a no obligation chat.

Will writing and Powers of Attorney involve the referral to a service which is separate and distinct to those offered by St. James’s Place and are not regulated by the Financial Conduct Authority.

Sources

Gov.uk Policy paper: Inheritance Tax on unused pension funds and death benefits Published 21 July 2025

Gov.uk Consultation outcome: Inheritance Tax on pensions: liability, reporting and payment – Summary of responses Updated 21 July 2025

Gov.uk Technical Note: Inheritance Tax on pensions Updated 29 May 2026

Gov.uk Inheritance Tax nil-rate band and residence nil-rate band thresholds from 6 April 2026 to 5 April 2028 21 November 2022

SJP Approved 07/08/2026