For years, pensions have been one of the few things you could usually pass on without worrying about Inheritance Tax. That is about to change. From 6 April 2027, Inheritance Tax on pensions becomes a reality: most unused pension funds and death benefits will count as part of your estate when the tax is worked out. The change was announced at the Autumn Budget 2024 and is now written into law by the Finance Act 2026.

Here is what is changing, who it affects, and what you can sensibly do about it — in plain English.

How pensions are treated today

At the moment, if you die with money left in a pension pot, it does not usually count towards Inheritance Tax (IHT). That is because most modern pension schemes pay death benefits at the trustees' discretion, which keeps the money outside your estate.

Income tax can still apply, though. If you die before age 75, pension money usually passes to your beneficiaries free of income tax, within certain limits. If you die at 75 or older, your beneficiaries pay income tax at their own rate on what they take out. That income tax position is not changing.

Inheritance Tax on pensions from 6 April 2027

For deaths on or after 6 April 2027, most unused pension funds and death benefits will be added to the value of your estate for IHT. Importantly, it will no longer matter whether the scheme pays out at the trustees' discretion — that route around IHT is closing.

Some things stay outside the new rules. Death-in-service benefits paid by your current employer's registered pension scheme are excluded, and so are dependants' scheme pensions, whatever type of scheme pays them. The existing exemptions also still apply: anything passing to your spouse or civil partner, or to charity, normally remains free of IHT.

Will my family actually pay more?

Many won't. IHT is only charged on the part of an estate above the tax-free thresholds: the £325,000 nil-rate band, plus the £175,000 residence nil-rate band where a home passes to children or grandchildren. Both are frozen until April 2031. Married couples and civil partners can combine their allowances, so up to £1 million can often pass on tax-free.

The government's own estimates suggest around 10,500 estates will become newly liable for IHT in the first year (2027 to 2028), and around 38,500 will pay more than they otherwise would have — and the government says these figures should be seen as a maximum. Most estates will still pay no IHT at all.

One wrinkle worth knowing about: the residence nil-rate band starts to reduce once an estate is worth more than £2 million. Because pensions will now count towards the value of your estate, some families could find this allowance shrinks.

Who sorts all this out?

The responsibility falls on your personal representatives — the people who deal with your estate after you die, usually the executors named in your will. From April 2027 they will need to track down every pension you held, ask each scheme for a valuation, include the figures in the estate's IHT account, and pay any tax due. IHT is normally payable within six months of the end of the month of death.

There is some practical help built in. Personal representatives or beneficiaries will be able to ask a pension scheme to pay IHT directly to HMRC out of the pension money, rather than having to find the cash elsewhere first. HMRC has said it will publish guidance, calculators and template forms for April 2027.

What you can do now

There is no need to panic — the change is still some months away, and the sensible preparations are mostly things worth doing anyway:

• Make a list of your pensions. Old workplace pots are easy to lose track of, and your executors will one day need to find every one of them. HMRC's own technical note points out that an up-to-date record of all your pension arrangements will significantly ease the burden on your personal representatives.
• Check your death benefit nominations. Each scheme holds a form saying who you would like your pension to go to. Anything left to a spouse or civil partner is normally exempt, so it pays to make sure these forms reflect your wishes.
• Revisit your will and wider estate plan. If your pension was sitting outside your IHT planning, your plan may now need a rethink.
• Get a feel for the numbers. Our free Inheritance Tax calculator can give you a rough idea of where your estate stands.

A quick note for Scotland and Northern Ireland

Inheritance Tax itself applies across the whole of the UK, but the way estates are administered is different in Scotland and Northern Ireland. This article reflects the position in England and Wales.

If you would like to talk through what the changes mean for you and your family, you can book a free consultation with us — no pressure, just a friendly chat.

This article is general information for England and Wales, not legal or financial advice, and the rules can change. Please seek personal advice about your own circumstances.