From April 2027, most unused defined contribution pension funds and pension death benefits are planned to be counted as part of a deceased person’s estate for IHT purposes. This is a significant change for families who have used pensions as a long-term household asset rather than spending them first.
We will explain the reforms in plain English and set out why the shift matters. Who this guide is for: homeowners aged 45–75 with meaningful retirement savings who want to reduce avoidable cost and admin for their family.
We’ll outline the practical options, what each option suits, and the likely trade-offs: cost, control, complexity and tax. The rules are still draft and may change, but planning windows matter, especially in 2025–26.
We can educate and help you frame decisions. But remember, regulated financial advice and legal advice have distinct roles depending on the steps you choose. For full details of the proposals see the government publication on unused pension funds and death.
Key Takeaways
- The April 2027 changes may bring many pension pots into an estate assessed for IHT.
- Those with sizable retirement savings should review options now while rules remain draft.
- Options vary by cost, control and complexity; there is no one-size-fits-all solution.
- We explain steps you can take and when to seek regulated advice or legal help.
- Personal representatives will have new duties that affect estate administration.
Why pension inheritance tax is changing from April 2027
We explain how the 2015 reforms led to the current policy rethink.
Since 2015, beneficiary drawdown removed the 55% charge and let families leave DC pots invested. That made many people treat funds as a multi‑generational investment wrapper for long‑term household wealth.
What the government plans to alter
The draft policy aims to treat most unused DC funds and death benefits as part of the estate for IHT for deaths on or after 6 April 2027.
Who is likely to be affected
Those with sizeable defined contribution pots, property and ISAs face the biggest risk. Adding a pot’s value can push an estate over nil‑rate bands and create a new IHT liability.
- Practical effect: more valuation steps and reporting for executors.
- Timing: applies to deaths on or after 6 April 2027, not earlier events.
- Scale: the OBR estimates about 10,500 estates may newly pay IHT in 2027‑28.
What counts as pension death benefits for IHT and what’s excluded
Not all payouts are treated the same; we spell out which common arrangements are likely to be included in an estate and which usually are not.
Defined contribution items likely in scope
Most unused DC pots will be included under the draft rules. That means lump sum payments from unused funds and payments taken under drawdown may be part of an estate.
- In scope: lump sum death payments from unused and drawdown arrangements, beneficiary drawdown and beneficiary annuities.
- Annuity items: guaranteed period payments and annuity contract balances can also be counted, so check older paperwork.
Key exclusions and special cases
Certain recipients and schemes sit outside the estate. Payments to a spouse or civil partner and gifts to charity remain exempt.
- Dependant’s scheme pensions and some death-in-service lump sums are usually excluded.
- Where a dependant annuity was set up alongside the member’s annuity, it often stays outside the estate.
Practical checklist for families
| Check | Why it matters | Action |
|---|---|---|
| Which schemes you hold | DC or DB affects scope | List providers and plan types |
| Nominations | Who is a beneficiary or partner | Review and update expression of wish |
| Existing annuities | Guaranteed periods may be included | Check contract wording |
How much inheritance tax could be due on your estate
A few clear figures will show when a 40% charge becomes relevant to an estate.
The nil‑rate band is £325,000 per person. It is the amount exempt from inheritance tax before the standard 40% rate applies. Use it first against estate value to see what, if anything, is taxable.
Residence nil‑rate band can add up to £175,000 when a home passes to direct descendants. That means a single person may have up to £500,000 of combined allowance in common cases.
Spouses and civil partners can transfer unused nil‑rate band at death. That often doubles the available allowance for the surviving partner, so keep clear records of earlier filings.
The 40% rate and when it bites
If your estate value exceeds available bands, the excess is taxed at 40%. For example, a £700,000 estate with £500,000 allowance faces 40% on £200,000 — a £80,000 charge.
Note the residence band tapers once total estate value passes £2,000,000. That means adding asset values — including some pensions — can push an estate into a higher liability bracket.
We recommend modelling scenarios over the next few years. If you need practical support, see our short guide on help with IHT planning.
protecting pension death benefits from inheritance tax uk: the buyer’s guide to your options
This buyer’s guide sets out practical routes you can consider to manage future liabilities.
Keeping funds invested vs drawing down
Leaving investments untouched can preserve growth and simplify cash flow in later life.
Drawing down earlier gives income now but may increase heir liability and affect means‑tested rules.
Spousal planning and exempt recipients
Transfers to a spouse or civil partner remain broadly exempt. That is often the simplest route to protect family wealth.
Gifts, charities and trusts
Gifting outright can become exempt after seven years. The market value at the time of gift matters.
Regular gifts from surplus income are exempt if they don’t reduce your standard of living. Keep clear records.
Gifts to qualifying UK charities are IHT‑exempt and cut liability while supporting causes you care about.
Trusts can help control assets but often trigger IHT events, potential CGT and ongoing trustee duties. They add complexity and cost.
When to seek advice
Use regulated financial advice for drawdown or investment moves. Seek legal advice for Wills, trusts and deed drafting.
Life insurance to cover the IHT bill without disrupting your investment strategy
Life cover can be a practical way to fund a future liability while you keep investments untouched.
Whole-of-life policies written into trust guarantee a lump sum on passing. That sum sits outside the estate when correctly set up. Money can reach trustees or family quickly, so your heirs need not sell property or other assets in haste.
Why speed and liquidity matter
Probate can take months. Executors may face an immediate bill while assets remain illiquid.
Insurance provides ready cash so households avoid rushed sales and emotional pressure at a difficult time.
Key disadvantages to consider
- Premiums rise with age, so cost can be significant for older applicants.
- Cover funds the liability; it does not reduce the amount owed.
- Liability levels can change, so the sum assured needs regular review.
Fixed-term assurance for time-limited risks
Term policies suit periods of known exposure, such as the seven-year window after a large gift. They are cheaper but expire once the period ends.
| Policy type | Best for | Key pro | Key con |
|---|---|---|---|
| Whole-of-life in trust | Long‑term estate cover | Proceeds outside estate; fast payment | Higher ongoing premiums |
| Fixed-term assurance | Short-term or gifting windows | Lower cost for limited years | Cover ends when term finishes |
| Level term with review | Changing liabilities | Balance of cost and flexibility | May need updating as assets change |
We recommend checking sums annually or after major changes to property, ISAs or pensions. That helps ensure the policy still matches likely iht liability and your family’s needs.
Who pays the IHT on pension death benefits and how payment works
When a member dies, different people can end up meeting the inheritance tax liability. Knowing the typical paths helps families plan cashflow and avoid delays.
Personal representatives: pay first, recoup later
Personal representatives (executors) usually settle IHT from estate funds first. This keeps probate moving and prevents interest or penalties.
Key point: where the estate and the pension beneficiary differ, directors can recover the amount from the beneficiary’s share if rules or the Will allow.
Beneficiaries: pay directly or ask the scheme to settle
A beneficiary may choose to pay the IHT themselves. That avoids the estate being reduced and can speed distribution.
Alternatively, beneficiaries can ask the scheme to pay IHT to HMRC from the scheme benefits. This gives immediate certainty but reduces the cash paid out to the beneficiary.
The £4,000 trigger and required information
Under the draft approach, schemes must offer to pay where the IHT on scheme funds exceeds £4,000. They may also do so below that level.
To process payment, schemes need clear information: beneficiary shares, which amounts are exempt (for spouses or charities) and the likely rate of iht. Getting this ready cuts delays.
| Who can pay | When used | Practical effect |
|---|---|---|
| Personal representative | Estate has sufficient liquid funds | Keeps probate smooth; can recoup from beneficiary where permitted |
| Beneficiary (self-pay) | Beneficiary has funds available | Preserves estate value; faster final distribution |
| Pension scheme pays | Liability > £4,000 or scheme agrees | HMRC settled before payout; reduces immediate cash to beneficiary |
What to ask the scheme
- Can you confirm the likely iht due and the paperwork required?
- Will you offer to settle tax where the liability exceeds £4,000?
- How will you split exempt and taxable portions when multiple beneficiaries exist?
- What timing should executors and beneficiaries expect?
What executors and beneficiaries should expect after a death from April 2027
Executors and beneficiaries will face new steps after April 2027 that change how scheme sums are valued and reported. We set out what to expect, month by month, and what to ask when you contact a provider.
Valuations at date of death and reporting timelines
Within four weeks of notification, schemes must give personal representatives the value of the death benefit at the date of death. This date‑of‑death value is the basis for iht purposes and can differ from the later claim or payment value.
That early figure helps executors decide whether the estate needs full reporting or a simple declaration. Expect follow-up figures as payments are processed.
How schemes split payments between exempt and non‑exempt recipients
Once beneficiaries are known, schemes will confirm amounts payable to exempt recipients (spouses, civil partners, charities) and to non‑exempt beneficiaries.
This split matters. If part is exempt, that portion can be released sooner. Non‑exempt sums may be held while IHT is calculated or settled.
How HMRC reporting may work and why administration could become more complex
HMRC plans guidance and a calculator to standardise reports. Still, multiple schemes or many beneficiaries will increase paperwork and delay final distributions.
Executors should gather clear records early: membership details, expression of wish forms and valuations. That reduces queries and repeated information requests.
Where both income tax and iht apply to the same death benefit
When a benefit is subject to both income tax and iht, income tax applies only after the IHT element is removed. If IHT is paid outside the scheme, a beneficiary may need to reclaim any overpaid income tax from HMRC.
Practical checklist for executors and beneficiary representatives
| Task | Why it matters | When to do it |
|---|---|---|
| Obtain date‑of‑death valuation | Base figure for iht calculation | Within 4 weeks of notifying the scheme |
| Collect expression of wish and membership docs | Confirms beneficiaries and any exemptions | As soon as possible after death |
| Ask scheme how they will split payments | Determines timing of releases | Before submitting claims |
| Check income tax position | May affect net payout and refunds | When tax calculations are finalised |
If you need a clearer primer on how scheme values feed into an estate calculation, see our guide on inheritance tax on pensions — understanding the key. We can help you prepare the right questions to ask providers and HMRC.
Planning moves to consider in 2025/26 before the rules change
Now is the time to map likely estate totals so you can see where pressure points sit.
Project future totals across scenarios
Pull pensions, property, ISAs and other assets into one simple spreadsheet. Use best, mid and low cases for values.
Check how the residence nil‑rate band tapers once total estate value goes above £2,000,000. That can change what your heirs face.
Review nominations and expressions of wish
Update each scheme’s nomination. Old forms can send money the wrong way even if your Will says otherwise.
Quick win: confirm providers hold current contact details and copies of your wishes.
Coordinate wills, ISAs and the family home
Make sure wills, trust deeds and retirement arrangements tell a single story. That reduces delays and dispute risk.
Factor in Business and Agricultural Relief changes
From April 2026 the first £1m of qualifying business or agricultural value keeps full relief; amounts above move to 50% relief.
“We recommend acting now, in 2025/26, to bring everything into one clear picture and reduce avoidable complexity.”
Conclusion
Conclusion
Households with significant retirement savings should act now: the estate treatment of pensions is changing in 2027. Most unused pots may be counted in the estate for iht for deaths on or after 6 April 2027, so check what sits inside your totals.
Know what is in scope, review nominations and update your Will. Consider the main routes: spousal or charitable transfer, gifting, trusts and life insurance written in trust for liquidity. Each route has trade‑offs in cost, control and complexity.
Gather key figures (pension values, property and other assets), then seek regulated financial and legal advice before making changes. For the government’s summary of responses and detail on the proposals see the official consultation summary.