Pensions and inheritance tax

Money left in a pension has, until now, sat outside the inheritance tax net: it did not count towards your estate when the tax was calculated. That changes on 6 April 2027, when most unused pension funds and death benefits are brought within the scope of inheritance tax as part of measures announced at Autumn Budget 2024¹. From that date, whatever is left in your pension pots is added to your home, savings and other assets when the tax bill is worked out.

The change does not affect every family. The government estimates that bringing unspent pensions into the scope of inheritance tax will affect around 8% of estates each year². Most estates stay below the thresholds and pay nothing. But for anyone whose pension is large, or whose other assets already push the estate near the allowances, the reform can change both how much tax is due and who has to deal with it, because personal representatives, the people who manage the estate, become responsible for reporting and paying tax on the pension as well as everything else¹.

Until the change takes effect, the position is unchanged: any money left in your pension is not counted for inheritance tax purposes³.

Unused pensions are being brought into inheritance tax

The reform was announced at Autumn Budget 2024 and legislated in the Finance Act that followed. The government's policy statement is explicit about what it does: "This measure will bring unused pension funds and death benefits into scope of Inheritance Tax from 6 April 2027"¹. The consultation on how the tax is reported and paid confirms that most unused pension funds and death benefits will be included in the value of a person's estate from that date⁷.

Two things are worth being clear about at the outset. First, the tax applies to what is left in the pension at death, not to the pension income someone drew while alive. Second, the responsibility for handling it shifts: from 6 April 2027, personal representatives will be liable to report and pay any inheritance tax due on unused pension funds or death benefits¹. That is a significant change of practice for executors and administrators, who previously had no need to value a pension at all.

The government has also built in a mechanism to stop money being paid out before the tax is settled. Where personal representatives reasonably expect inheritance tax to be due, they can direct pension scheme administrators to withhold 50% of the taxable benefits for up to 15 months from the date of death⁸. This does not apply to exempt benefits, funds under £1,000, or continuing annuities⁸. The practical effect is that beneficiaries may wait longer to receive their inheritance from a pension than they are used to.

How pensions have been treated for inheritance tax until now

Until the reform, pensions enjoyed a privileged position. Pension assets are currently generally exempt from inheritance tax, as the House of Commons Library's research briefing puts it⁹, and Pension Wise states the same in plainer terms: "Until April 2027, any money left in your pension will not be counted for Inheritance Tax purposes"³. Because of this exemption, pensions have been seen as a useful tool for estate planning².

The exemption was not the only favourable rule. The income tax treatment of inherited pensions was also loosened in 2015. Previously, a tax of 55% was charged on inherited pensions; this was abolished as of April 2015¹⁰. Since then, the tax a beneficiary pays has depended mainly on the age at which the member died, which is covered in detail below.

The combination of the inheritance tax exemption and the flexible income tax rules made an untouched pension pot one of the most tax-efficient things to leave behind. That is precisely what the 2027 reform ends: the pension keeps its income tax treatment but loses its separate status for inheritance tax. Generally, pension sums have not been liable for inheritance tax¹⁰, but from April 2027 they are valued alongside everything else in the estate.

What changes for your estate when pensions count towards it

From 6 April 2027, any unspent pensions will count towards the value of your estate when inheritance tax is calculated¹¹. The change applies regardless of your age when you die: inheritance tax may be charged on money left in your pension if the value of your overall estate exceeds the tax-free allowance². Pensions and most pension death benefits are included within the estate from that date¹².

The change applies across the UK, to estates of people domiciled in the UK¹³. The mechanics are straightforward even where the sums are not: the pension's value is added to the estate, the allowances are deducted, and 40% is charged on the excess if the estate is above the thresholds¹⁴. One worked example from independent guidance shows the scale of the effect: an estate excluding pensions of £800,000, with a £500,000 home left to children and £400,000 in defined contribution pensions, faces an inheritance tax bill of £80,000 from April 2027, where before the change the pension would have escaped the tax entirely¹¹.

The impact is uneven. Independent analysis has found that some families will be hit harder than others by the new rules, particularly where a large pension sits alongside a home that already uses much of the allowance¹⁵. Unmarried partners are affected most sharply, because they cannot use the spouse exemption or transfer unused allowances between them; the same analysis gives an example in which an estate that includes a pension inherited from an unmarried partner faces a tax bill from April 2027 where a spouse would pay nothing¹⁵.

Inheritance tax thresholds: £325,000 per person, up to £1m for couples

Inheritance tax is a tax on the estate of someone who has died, and it is charged at 40% on everything above the tax-free thresholds¹⁶. The headline figures are fixed in the official rates and allowances: the nil-rate band limit is £325,000 per person⁶. Anything left to a spouse or civil partner is exempt, and unused allowances can transfer to the survivor, so a couple can potentially pass on up to £1m entirely tax-free when the residence nil rate band is included¹⁷.

The allowances stack up as follows:

The residence nil rate band has conditions and a taper. It applies where someone dies after 6 April 2017 and leaves a property that they own, or co-own, to direct descendants¹⁶, and only the main home qualifies, though you can choose which property that is¹⁸. It is reduced for larger estates: the band is reduced, and can be wiped out altogether, where the net estate exceeds £2 million, reducing by £1 for every £2 of value above that level¹⁸. A large pension brought into the estate from April 2027 therefore has a knock-on effect: it can push the estate over £2 million and shrink the residence allowance even though the pension itself is not a home.

Unmarried couples get none of the transferable allowances. Married couples and civil partners can pass on £1m inheritance tax-free in the right circumstances, whereas unmarried couples are limited to £500,000 each, because they cannot inherit a partner's unused nil-rate bands¹⁸. Lifetime gifts also interact with the allowances: the nil rate band that applies is the inheritance tax threshold minus any lifetime gifts¹⁹, and gifts made in the seven years before death can be brought back into the valuation, with tax on gifts above the allowance tapering from 40% for gifts made within three years of death down to 8% for gifts made six to seven years before¹⁸. Small gifts are exempt separately: as a couple you can usually give away £6,000 per year as standard, and potentially £12,000 if no substantial gifts were made the year before⁴.

Estates below the thresholds owe nothing. Official guidance notes there are estates where there can be no liability to inheritance tax because the gross value does not exceed the nil rate band, or twice it where there is a valid claim to transfer the unused band from a predeceased spouse or civil partner²⁰.

Pensions left to a spouse or civil partner stay exempt

The most important exemption survives the reform intact. Anything left to a surviving spouse or civil partner, including pensions, remains 100% exempt from inheritance tax⁵. The exemption is unconditional as to amount: a surviving spouse or civil partner never pays inheritance tax on anything you leave them, regardless of the amount, as long as you are both domiciled in the UK¹¹. The same rule already applied to pension income a spouse could inherit, and it continues for pensions after April 2027¹².

The domicile condition matters. Assets left to a spouse or civil partner are exempt from inheritance tax provided both partners are domiciled in the UK²¹. Where one partner is domiciled abroad, the exemption can be restricted, and that is a point on which specialist advice is worth having.

There is a second benefit for couples. Unused allowances pass to the surviving partner, so when the second partner dies, up to £1m could be passed on tax-free¹⁴. In practice this means the reform bites hardest on the second death in a marriage or civil partnership, and on estates left to anyone other than a spouse or civil partner.

Income tax on inherited pensions: before and after age 75

Inheritance tax is only half the picture. Income tax also applies to inherited pensions, and the dividing line is the age of the person who died. If you die before age 75, your pension can usually be inherited tax-free as long as certain conditions are met, including that the money is paid within two years and within the lump sum and death benefit allowance³. If you die after age 75, the pension usually cannot be inherited tax-free: the inherited amount is normally added to your beneficiary's other income to calculate how much income tax is due²².

The official position on deaths at or after 75 is that benefits are usually taxed as income at the recipient's marginal rate²³. Independent guidance states the same: if a person is over the age of 75 when they die, any money left in their pension is subject to income tax at the beneficiary's marginal rate²⁴.

From April 2027, both taxes can apply to the same pot, which raised concerns about double taxation, with the effective marginal rate reaching up to 64% where pension funds were subject to both¹³. The rules are designed to prevent the worst of that. A technical note published by HMRC in May 2026 clarified that, where inheritance tax is due, it will be applied to the pension first; beneficiaries are then eligible for a statutory deduction and pay income tax only on the remaining amount after inheritance tax has been settled¹³. Income tax will not be due on the amount of death benefits equal to the inheritance tax due on the pension²³.

There are further protections. If a beneficiary directs the pension scheme administrator to pay their inheritance tax liability, those payments are authorised payments and will not be subject to income tax²³. If part of the pension is used to pay the inheritance tax directly, that amount is not subject to income tax either²⁴. And where too much tax has been taken, the refund is treated as though it were a pension paid under the registered pension scheme, accruing in the tax year in which it is paid²⁵.

Lump sum and death benefit allowance: up to £1,073,100

Alongside the inheritance tax rules sits a separate cap on tax-free lump sums. The Lump Sum and Death Benefit Allowance is £1,073,100, as set out in the official rates and allowances⁶. It counts tax-free lump sums taken from your pension before and after you die, and it is £1,073,100 for most people²². The most a beneficiary can take from all your pensions as a tax-free lump sum is £1,073,100².

The allowance exists because the old lifetime allowance was abolished, and the LSDBA now polices the boundary instead. There is also a separate Lump Sum Allowance of £268,275, which applies to tax-free cash a person takes from their own pension during their lifetime⁶. The two figures do different jobs: the Lump Sum Allowance limits what you can take tax-free while alive, while the LSDBA is the wider pool that also covers death benefits paid after you die.

For deaths before age 75, the LSDBA is the gate that decides whether the pension passes free of income tax. If the death benefits fit within the allowance and are paid within two years, no income tax follows³. If they exceed it, the excess is taxed at the beneficiary's marginal rate²³. From April 2027, inheritance tax may apply as well, worked out first, with income tax charged only on what remains¹³.

Who gets your pension: nominations and dependants

Pensions do not normally pass under your will. With a defined contribution pension, the most common type of private pension, you choose a nominated beneficiary, and money left in the pot can be left to anyone you nominate². The Financial Conduct Authority's own consumer guidance confirms that money left in a defined contribution pension can be left to anyone you nominate²⁶. The scheme administrator usually pays according to your expression of wish, but it keeps final discretion, so keeping the nomination up to date matters, particularly after a divorce or remarriage.

Defined benefit pensions work differently. What is paid is usually a dependants' scheme pension, a fixed regular income to a surviving spouse, civil partner or child, rather than a pot that can go to anyone. The legal definition of a dependant for this purpose is narrow: the recipient must be a spouse, a civil partner, or a child under the age of 23, unless they have a disability⁵. Pension tax legislation also allows schemes to provide a survivor pension to a person who was not married to or a civil partner of the member but was financially dependent on them²⁷, which is how some unmarried partners receive anything at all from a final salary scheme.

The new inheritance tax rules treat these two types differently. Dependants' scheme pensions, providing a fixed regular income, will generally remain outside the scope of inheritance tax even after April 2027⁵. Payments to a spouse or civil partner from a defined benefit scheme are likewise not subject to inheritance tax after the change¹¹. A defined contribution pot left to anyone other than a spouse or civil partner, by contrast, is fully within the scope of the tax.

One further point affects beneficiaries directly: from the point at which they are appointed, pension beneficiaries become jointly and severally liable with the personal representatives for any inheritance tax due on the pension benefits they have inherited²³. A beneficiary is not a passive recipient under the new rules; they share responsibility for the tax on what they receive. While the pot remains invested, the fund continues to be invested and yearly statements and forecasts are issued²⁸.

Who reports and pays the tax, and the six-month deadline

The reporting and payment system is led by the personal representatives. From 6 April 2027, personal representatives will be liable to report and pay inheritance tax on pensions⁷. The government has confirmed it does not intend to change the six-month payment deadline under this process²³.

The deadlines and mechanics work as follows:

1. The pension scheme administrator must tell the personal representatives the value of the pension for inheritance tax purposes within 4 weeks of receiving notification of the member's death²³.
2. Inheritance tax must be paid by the end of the sixth month after the person dies to avoid paying interest²⁹.
3. Where tax is due, the personal representatives can direct the scheme to withhold 50% of taxable benefits for up to 15 months from the date of death³⁰.
4. Both the personal representative and the beneficiaries can request that the pension provider pay any tax due directly to HMRC⁵.

Exempt beneficiaries, including spouses and civil partners, will be able to take their benefits immediately, without waiting for the estate's tax position to be resolved²³. Where there is no will, someone who expects to act as executor may, with evidence, issue a withholding notice⁵.

If the tax cannot be paid in one go, instalments are available: the first instalment is due at the end of the sixth month after the death, with payments then due every year on that date³¹. Interest is charged on late payment¹⁶. Personal representatives still face a six-month window from the end of the month of death to settle any inheritance tax due⁵. Refunds of overpaid tax are handled at the end of the process: generally, inheritance tax refunds will not be made until the deceased's account is settled²³.

Leaving 10% to charity: a 36% rate

There is one widely available way to cut the rate itself. If you leave at least 10% of your net estate to charity you may qualify to pay inheritance tax at a reduced rate³². The reduced rate is 36% rather than 40%, and it applies to the rest of the estate where more than 10% of the taxable estate is left to charity in your will²¹. The official rates and allowances confirm the figure: the reduced rate for estates leaving 10% or more to charity is 36%⁶.

The calculation is based on the net estate, meaning the amount above your allowances, not the total value of everything you own²¹. Only donations in your will count: lifetime charitable giving does not qualify you for the reduced rate, whereas a legacy in your will representing 10% or more of your taxable estate does³³. Leaving more than 10% of your taxable estate to charity in your will reduces the inheritance tax rate on the rest from 40% to 36%¹³.

From April 2027, the pension's value feeds into this calculation too, because the taxable estate includes the pension once it is counted. For an estate near the 10% threshold, a pension brought into the valuation changes both the size of the taxable estate and the amount a charitable legacy needs to reach. Charitable legacies themselves are exempt from inheritance tax, so the gift reduces the estate as well as the rate.

Where to get help with a pension or estate

Several forms of free help exist, and the right one depends on the question. For pension questions, Pension Wise offers free guidance appointments covering when you can access your pension pots, the different ways to take money from your pension, how each option is usually taxed, and how to spot and avoid scams³⁴. The Pensions Ombudsman handles complaints about pension schemes, and guidance on what happens to your pension when you die and how to nominate a beneficiary is covered elsewhere on this site.

For the estate side, the personal representative's task of valuing the estate is set out in official guidance on valuing the estate of someone who has died²⁹, and penalties may apply if valuations are not accurate³⁵. A House of Lords committee has urged the government to take steps to raise awareness of the pension reforms and produce practical guidance and support for those affected³⁶, and further official guidance is expected as the start date approaches. HMRC has also consulted on changes to the information sharing regulations between pension schemes and itself, with the consultation closing at 11:59pm on 11 June 2026³⁷.

Where the person who died had pensions from abroad, or the survivor lives overseas, the International Pension Centre at the Department for Work and Pensions handles State Pension queries from overseas³⁸. In Scotland, support with inheritance tax is available through mygov.scot³². Because the rules from April 2027 are new and in places still being implemented, anyone dealing with a large estate that includes a pension may find that professional advice and the scheme administrator's own guidance are needed alongside these free services.