Pensions and inheritance tax: What’s changing and how to prepare
From 6 April 2027 under current proposals, the treatment of defined contribution (DC) pension funds for inheritance tax (IHT) purposes will change significantly. Under the new regulations, most unused DC pension funds will now be included in your estate when assessing IHT liabilities. This marks a departure from the current system, where the majority of DC pensions can be inherited without being subject to IHT.
Key changes
- Unused DC pension funds will usually be included in your estate for IHT.
- The responsibility for reviewing, reporting and paying IHT will typically fall to your Personal Representatives (PRs), the people who manage your estate after your death.
- Certain death-in-service and defined benefit (DB) dependant pensions are excluded from these changes.
Example:
If you pass away with a DC pension pot that you haven’t fully drawn, the value of the remaining fund may now be subject to IHT at 40%, depending on the size of your estate.
If you pass away with a DC pension pot that you haven’t fully drawn, the value of the remaining fund may now be subject to IHT at 40%, depending on the size of your estate.
Who pays the tax and when?
Your Personal Representatives will be responsible for reviewing, reporting and paying any IHT due on your pension funds. This is a new administrative burden, and it’s vital that your pension nominations and estate planning are up to date to avoid delays or unexpected tax bills for your beneficiaries.
How age and tax treatment interact
Currently:
- If a person dies before age 75, their pension death benefits are currently paid income tax-free to their beneficiaries.
- If a person dies after age 75, beneficiaries pay income tax on withdrawals at their marginal rate of income tax.
From April 2027:
- Regardless of age at death, the unused pension fund will also be considered for IHT, making nomination forms and drawdown strategies even more important.
A common misconception is that your Will controls who receives your pension. In reality, your pension provider will look to your nomination form and potentially your Will.
Pension nominations are more important than ever because of the income tax and soon the inheritance tax implications. So keeping them up to date ensures your wishes are followed and can help your family avoid unnecessary tax or delays.
Practical planning steps for 2026/27
- Review your estate size: With IHT thresholds frozen until 2030 (£325,000 Nil Rate Band, £175,000 Residence Nil Rate Band), more estates are being caught.
- Consider consolidating pensions: This can simplify administration for your Personal Representatives and ensure consistent death benefit rules.
- Update your Will and nominations: Make sure all documents reflect your current wishes.
- Speak to an adviser: Tax and financial advice is more valuable than ever in this changing landscape and can ease the burden of trying to navigate all the upcoming changes.
Tax treatment depends on individual circumstances and may change in the future. The information contained in this document is based on current understanding of legislation and HMRC practice as at January 2026.
Pensions are a long‑term investment. The value of investments can go down as well as up and you may get back less than you originally invested.
Frequently asked questions
Will my spouse automatically receive my pension?
Not necessarily. Only if your spouse is named on your nomination form. Otherwise, the provider may pay a lump sum to your estate, which could increase the IHT bill.
Not necessarily. Only if your spouse is named on your nomination form. Otherwise, the provider may pay a lump sum to your estate, which could increase the IHT bill.
Are all pensions affected?
Most DC pensions are. Some death-in-service and DB dependant pensions are excluded.
Most DC pensions are. Some death-in-service and DB dependant pensions are excluded.
What if I have multiple pension pots?
Consider consolidation for easier administration and consistent application of the new rules.
Consider consolidation for easier administration and consistent application of the new rules.
We’re here to help
Our Financial Planners can support you with reviewing your options and helping you plan for your retirement, please get in touch with a member of our specialist team via the form below.