From 6 April 2027, most unused defined-contribution pension funds and pension death benefits will count as part of your estate for Inheritance Tax, for deaths on or after that date. This follows Finance Act 2026, which received Royal Assent on 18 March 2026. If you die on or after 6 April 2027 with a substantial pension pot still unused, it can now be taxed at up to 40%, on top of whatever else you leave, where your estate exceeds your available allowances. Deaths before 6 April 2027 are unaffected: the current rules, under which most pensions sit outside the estate, still apply.
What is actually changing?
Today, most unused money purchase (defined contribution) pension funds fall outside your estate when you die, because a pension scheme member is not treated as owning the pension's assets for Inheritance Tax purposes. From 6 April 2027, that changes. New rules bring most "notional pension property", meaning unused pension funds and most pension death benefits, into the value of your estate, in the same way as your house, savings and other assets.
This is set out in HMRC's technical note: Inheritance Tax on pensions, published 11 May 2026. The change is effective for deaths on or after 6 April 2027. If you die before that date, the current rules apply even if your pension is paid out to your beneficiaries afterwards.
Death-in-service benefits are excluded from this change. A lump sum payable because you died while employed, rather than as a retirement pension, does not count as notional pension property and stays outside your estate.
Defined benefit (final salary) pensions are affected too, in outline, but the detail is different from money purchase schemes and beyond the scope of this guide. If you hold a defined benefit pension, the same 6 April 2027 start date and estate-inclusion principle applies; ask us about your scheme specifically.
Who is liable for the tax, and who is not?
Your personal representatives, meaning your executors or administrators, are responsible for reporting and paying any Inheritance Tax due on your notional pension property. This is confirmed in section 2.2 of the technical note. Once the pension property has vested in a beneficiary (broadly, once the scheme trustees have decided who receives it), that beneficiary becomes jointly and severally liable alongside the personal representatives for the tax attributable to their share.
Pension scheme administrators and trustees are not liable for the tax in normal circumstances. This reverses the position originally proposed in 2024, when liability was expected to sit with scheme administrators. The exception is narrow: a scheme administrator only becomes jointly and severally liable if it fails to act on a valid withholding notice or payment notice from a personal representative or beneficiary.
To help personal representatives collect the tax before the pension is paid out, the technical note describes a new withholding mechanism. A personal representative (or, if there is no will, a prospective personal representative) can serve a withholding notice on a registered pension scheme, instructing it to hold back up to 50% of a beneficiary's entitlement. This can be given at any time from the date of death up to 15 months after the end of the month of death, and it protects personal representatives from having to fund the Inheritance Tax bill from other, non-pension assets while the estate is still being valued. Separately, a payment notice lets a personal representative or beneficiary instruct the scheme to pay Inheritance Tax and interest directly to HMRC from the pension, within 35 days of a valid notice.
What still passes free of Inheritance Tax?
Two of the biggest reliefs are unaffected by this change.
Spouse and civil partner exemption applies in full to notional pension property, exactly as it does to the rest of your estate. If your pension passes to your spouse or civil partner and you are both long-term UK residents, there is no Inheritance Tax on it, regardless of the amount.
Death-in-service benefits remain excluded, as above, because they are not treated as notional pension property at all.
Charity gifts also keep their existing treatment. A lump sum death benefit paid to a qualifying charity is tax-free, and any charitable pension gift counts towards the 10% of net estate needed to qualify for the reduced 36% Inheritance Tax rate, instead of the standard 40%, on the rest of the estate.
How much Inheritance Tax could this add?
The answer depends on your existing allowances and the rest of your estate. The two main allowances are frozen for a while yet.
Both figures are confirmed on gov.uk's Inheritance Tax thresholds and interest rates page. The nil-rate band table runs to 5 April 2031. The residence nil-rate band table currently runs to 5 April 2030; check the same page nearer the time in case it is extended further.
The RNRB, where it applies, tapers away once an estate exceeds £2 million, reducing by £1 for every £2 over that threshold. Adding a pension to the estate can push a previously modest estate over this taper threshold, losing some or all of the RNRB as well as bringing the pension itself into charge.
Above your available allowances, the standard rate is 40%. Where at least 10% of the net estate goes to a qualifying UK charity, the reduced rate of 36% applies instead.
Example: before and after 6 April 2027
Example. Consider a single person (no spouse or civil partner) whose estate is a house and savings worth £600,000, passing to their children, plus a separate, unused defined contribution pension pot worth £400,000.
Today (death before 6 April 2027). The pension sits outside the estate. Only the £600,000 house and savings count. Using the nil-rate band of £325,000 and the residence nil-rate band of £175,000 (assuming the RNRB conditions are met, since the house passes to children), the available allowances total £500,000. Taxable estate: £600,000 minus £500,000 = £100,000. Inheritance Tax at 40%: £40,000.
From 6 April 2027. The £400,000 pension is added to the estate. Total estate: £600,000 + £400,000 = £1,000,000. The same £500,000 of allowances applies (assuming both are still available and the RNRB is not tapered away, which it is not at this estate size). Taxable estate: £1,000,000 minus £500,000 = £500,000. Inheritance Tax at 40%: £200,000.
The same person, the same assets, and the only thing that changed is the date of death either side of 6 April 2027: the Inheritance Tax bill rises from £40,000 to £200,000, a £160,000 increase, purely because the pension is now inside the estate.
Drawdown or gift: what are the trade-offs?
Faced with this, some people ask whether they should simply draw down the pension during their lifetime and give the money away instead. There is no single right answer, and each route carries its own cost.
Drawing down a pension triggers Income Tax on anything above your 25% tax-free entitlement, at your marginal rate, in the tax year you draw it. Withdrawing a large pension pot in one go to make a gift could push you into a higher Income Tax band for that year, which may cost more than the Inheritance Tax you are trying to avoid.
Gifting the money once withdrawn brings you back into the standard lifetime gifting rules. A gift is only free of Inheritance Tax if you survive seven years, under what is generally known as the seven-year rule; if you do not, it may still be taxed, on a sliding scale for gifts made three to seven years before death. An alternative some people use is normal expenditure out of income: regular gifts made from surplus income, rather than capital, which can be immediately exempt from Inheritance Tax if they meet HMRC's conditions and do not reduce your standard of living.
Which of these suits you, if any, depends on your income needs in retirement, your health and life expectancy, who you want to benefit, and how much of the pot you can afford to part with. This is not a decision to make from a worked example alone.
What this means in practice
Some of this you can start now. Find out what type of pension scheme you hold (money purchase or defined benefit), check who your nominated beneficiaries are, and get a current valuation of the pot from your provider.
Other parts need advice before you act. Whether to draw down some of the pension now, whether to keep it invested and pass it on, and how any pension gift interacts with the rest of your will and wider estate all depend on your full financial position, not just the pension in isolation. Our inheritance tax planning page covers the wider estate picture this change sits within.
If you are already administering an estate where death occurred on or after 6 April 2027, your executors will need to contact every pension scheme the deceased held, request a valuation of notional pension property, and establish whether a withholding or payment notice is needed before distributing benefits. Our probate page explains how that administration process works.
FAQ
No. The change only applies to deaths on or after 6 April 2027. If you die before that date, your pension is treated under the current rules, even if it is paid out to your beneficiaries afterwards.
Yes. The spouse and civil partner exemption applies to notional pension property in the same way as the rest of your estate, provided you are both long-term UK residents, so there is no Inheritance Tax on a pension passing to a spouse or civil partner.
No. Death-in-service benefits, meaning a payment made because you died while employed, are excluded from notional pension property and are not brought into your estate by this change.
Your personal representatives are responsible for reporting and paying it, not your pension scheme administrator. Once the pension is vested in a beneficiary, that beneficiary is jointly and severally liable alongside the personal representatives for the tax on their share.
Not necessarily. Withdrawing a large sum can trigger Income Tax at your marginal rate on anything above your tax-free entitlement, and any gift you then make only falls outside your estate if you survive seven years. Whether drawdown, gifting, or leaving the pension in place suits you depends on your income needs and the rest of your estate.
Talk to us before you change anything
If you hold a defined contribution pension and had planned on it passing free of Inheritance Tax, speak to Chloe Symmonds, Senior Manager, before you make any decisions about drawdown or gifting. The first conversation is about understanding your pension alongside the rest of your estate, what allowances you have available, and what, if anything, is worth doing before 6 April 2027. Call 020 8554 2135 or email info@visionconsulting.co.uk, or get in touch via our contact page.
This is general information, not advice. Your position depends on your circumstances. Speak to us before acting on anything here.