Pensions and Inheritance Tax from April 2027

For years, a pension was the one thing you were told to leave alone. Spend the savings, sell the shares if you have to, but leave the pension until last, because it sat outside your estate and passed to your family free of Inheritance Tax.

That reverses on 6 April 2027, when most unused pension funds and death benefits start counting as part of your estate. It is already law, in Finance Act 2026, and HMRC has explained how it will work in a technical note published on 11 May 2026. It is the biggest change to estate planning in a generation, it is eight months away, and most people have not heard about it.

Squiggle is an estate planning consultancy, not regulated by the Financial Conduct Authority. Pension decisions are regulated financial advice, so we explain the tax rules and what they mean for your Will, and leave the pension itself to a regulated adviser.

Where things stand today

Most UK pension schemes are discretionary: the trustees decide who receives death benefits, guided by your expression of wishes. Because you had no legal right to direct the money, the pot has not counted as part of your estate, and unused funds have passed on free of Inheritance Tax.

Income Tax is separate, and already bites. Die under 75 and death benefits are usually tax-free, provided the lump sum and death benefit allowance is not exceeded. Die at 75 or over and everything your beneficiary draws is taxable at their marginal rate. That is not changing.

What changes on 6 April 2027

The change applies to deaths on or after 6 April 2027. If someone dies before that date the current rules apply, even if the money is paid out later.

A new section 150A of the Inheritance Tax Act 1984 treats you as beneficially entitled, immediately before death, to what HMRC calls your notional pension property. In plain English, your pension is added to everything else you own and taxed the same way.

What is caught

• Unused money purchase pots: personal pensions, SIPPs and drawdown funds, discretionary or not.
• Defined benefit lump sum death benefits, and continuing payments under a guarantee period where you die within ten years of taking the pension.
• Qualifying non-UK and section 615(3) schemes, subject to the long-term UK residence rules.

What is not caught

HMRC has confirmed a short list of excluded benefits. These were the points most argued over during consultation.

• Death in service benefits from a registered scheme, but only where paid because you were in employment or other work immediately before death. A lump sum from an old scheme you were only a deferred member of does not qualify.
• Dependants' scheme pensions, whatever arrangement pays them. They stay taxable as income for the recipient.
• Trivial commutation lump sums, where they replace a dependants' scheme pension that would itself have been exempt.
• Joint life annuities: a dependants' or nominees' annuity bought together with your own lifetime annuity.

Charity lump sum death benefits stay free of Income Tax even where you died at 75 or over, and count towards the 10% test that cuts the rate from 40% to 36%. Business Relief and Agricultural Relief cannot apply to a pension, because you are not treated as owning the underlying assets: see Business and Agricultural Relief.

If it all goes to your spouse, nothing changes

This is the most reassuring fact in the whole change. Anything passing to your spouse or civil partner stays exempt from Inheritance Tax, without limit. Gifts to UK charities are exempt too. So if your pension is nominated to your husband or wife, April 2027 costs your family nothing at that point. The question moves to the second death, where most Inheritance Tax has always been paid.

One thing does change: the scheme must report the full value of the pot to your executors even where it all goes to an exempt beneficiary, and your executors then claim the exemption.

The double tax problem

Where a member dies at 75 or over, two taxes reach the same money: Inheritance Tax at 40%, then Income Tax at the beneficiary's marginal rate on what they draw (see the current rates and bands). HMRC has provided an adjustment, though not a complete one. Where Inheritance Tax is paid on death benefits, the part of the benefit corresponding to that tax does not count towards the beneficiary's taxable income. The taxes stack, but they do not compound.

A worked example

Imagine Margaret, a widow who dies in June 2027 aged 79. Her home and savings come to £1 million, and she leaves a £200,000 drawdown pot nominated to her son David. Her late husband's allowances passed to her in full, giving her £1 million of allowances, and the home passes to David.

Her estate is £1.2 million, £200,000 over her allowances, so the Inheritance Tax is £80,000. Because those allowances would have covered everything else, the whole bill is down to the pension.

• Pension pot: £200,000
• Inheritance Tax at 40%: £80,000
• David is taxed on the remaining £120,000, not the full £200,000
• He is a higher rate taxpayer, so Income Tax at 40% is £48,000
• He keeps £72,000 of a £200,000 pot: an effective rate of 64%

A basic rate taxpayer would keep £96,000, an effective 52%. An additional rate taxpayer would keep £66,000, an effective 67%.

Who actually pays, and by when

• Your executors, as personal representatives, report the pension and are liable for the tax.
• Beneficiaries become jointly and severally liable with them once the trustees decide who gets what.
• Pension schemes are not normally liable, unless they ignore a valid notice.
• The deadline is unchanged: tax is due at the end of the sixth month after the month of death, with interest after that.

Your executors must ask every scheme for the date of death value and the split between exempt and non-exempt beneficiaries. The scheme has 28 days to reply, or to give an estimate and the final figure within 14 days. If an account is needed, a second request gets each beneficiary's name, address, National Insurance number and the value going to them.

1. A withholding notice. Executors can make a scheme hold back up to 50% of a beneficiary's entitlement, up to 15 months after the end of the month of death. It is not meant to be routine, and it cannot touch excluded benefits or anything going to an exempt beneficiary.
2. The pensions direct payment scheme. Executors or beneficiaries can instruct the scheme to pay the tax straight to HMRC out of the pension, minimum £1,000, within 35 days. Usefully, the benefit is reduced first, so Income Tax is charged net of Inheritance Tax.

Two limits catch people out. Inheritance Tax on a pension cannot be paid by instalments, unlike tax on a house or a business. And where executors direct payment, the tax must be apportioned fairly, taken from the beneficiaries whose benefits caused it rather than from the rest of the estate. Our Estate Administration factsheet covers the wider job.

The £2 million trap

Here is the part almost nobody has spotted. The residence nil rate band of £175,000 per person tapers by £1 for every £2 by which an estate exceeds £2 million, and a single person's allowance is gone entirely at £2.35 million. That allowance and the £325,000 nil rate band are both frozen until 5 April 2031, so nothing rises to absorb a pension pot joining the estate. The taper is measured before exemptions and reliefs, and from April 2027 your pension is part of that value.

So a family with a £1.8 million estate and a £400,000 pension, comfortably under the threshold today, is at £2.2 million and loses £100,000 of allowance: £40,000 of extra tax on top of the tax on the pension. Because the taper ignores exemptions, it can bite even where the pension goes to a spouse and no tax is due on it. HMRC has not yet published guidance on this. See Residence Nil Rate Band and Inheritance Tax Mitigation.

What to review now

None of this is advice about your pension. These are questions for the right person: an FCA authorised financial adviser for the pension, and us for the Will.

• When did you last look at your expression of wishes? A form completed fifteen years ago may name an ex-partner, someone who has died, or nobody.
• Do your Will and your pension nominations point the same way? They are separate documents and do not talk to each other. A live problem in second marriages: see Estate Planning for Blended Families.
• Have your executors got a list of your schemes? They now have to find every one, and a certificate of discharge depends on a genuine effort.
• Does the order you plan to spend in still make sense? Many people were told to leave the pension untouched. That was written for different rules, and whether it should change is a question for a regulated adviser.
• Is your Will still doing what you think? See Writing Your Will, or Changing Your Will if you have one, and Starting Your Legacy Planning or Inheritance Tax: The Squiggle Approach if you are starting from scratch.

A word about acting quickly

Eight months is not long, and the temptation to act is real. Please be careful. Taking money out of a pension to get ahead of a future Inheritance Tax charge creates an Income Tax bill now, at your marginal rate, on everything above your tax-free cash. It can cost you your personal allowance and leave you short later on, and money given away still has to survive seven years to leave your estate: see Gifts and the Seven Year Rule.

Please do not make a pension decision on the strength of a factsheet. Speak to an FCA authorised financial adviser. Squiggle does not give financial advice.

HMRC has also said further guidance and secondary legislation will follow before implementation. Draft information sharing regulations went out for consultation in May 2026 and have not yet been made, and the tax manuals, notice templates and support tools are still to come. This reflects the position in August 2026, so please check the current position before relying on it.

Common mistakes

Assuming your Will controls your pension. It does not. The trustees decide, guided by your expression of wishes, so a perfect Will and a stale nomination form still send the money to the wrong person.

Thinking the spouse exemption solves it. It solves the first death. On the second, the pension sits in the estate like everything else.

Forgetting the £2 million taper. Estates nowhere near it can be pushed over by a pension pot, costing up to £175,000 of allowance per person.

Questions? Book a free call

For most families the honest answer is that the plan needs a look rather than a rebuild. Pick a time that suits you and your local Squiggle consultant will call you. No charge, no obligation, no pressure. Where a pension decision is involved we will say so and point you to someone regulated to advise on it. Book a call or call 01233 659 796.

Talk to Squiggle: 01233 659 796 | hello@squiggleconsult.co.uk | www.squiggleconsult.co.uk | Book a free call: meet.squiggleconsult.co.uk

This factsheet is general information for England and Wales, not legal, tax or financial advice. Squiggle Consult is not regulated by the Financial Conduct Authority and does not advise on pensions or investments. Worked examples are hypothetical. Tax rules and rates can change. Last reviewed: August 2026.