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For years, unused pension funds have sat outside of a person's estate for Inheritance Tax purposes. That is changing. From 6 April 2027, most unused pension funds and death benefits will be included in the value of an estate when calculating any Inheritance Tax liability. The legislation received Royal Assent in March 2026 and is not subject to further amendment.
This is one of the more significant shifts in personal tax planning in recent memory, and it affects a wider group of people than many realise, particularly those who have built up substantial defined contribution pension pots with no immediate intention of drawing them down fully.
How does Inheritance Tax currently work?
Inheritance Tax is charged at 40% on the value of an estate above the available tax-free thresholds, which are frozen until 5 April 2030. Every individual has a nil rate band of £325,000. Where a home passes to direct descendants, a residence nil rate band of £175,000 applies on top of that, bringing the total to £500,000 for a qualifying individual. Married couples and civil partners can combine their allowances, meaning up to £1,000,000 can pass between them free of Inheritance Tax.
Transfers between spouses and civil partners are exempt from Inheritance Tax regardless of value. Gifts to registered charities are also exempt. These exemptions are unchanged by the pension reforms.
What is changing from April 2027?
Under the current rules, most pension funds pass outside of the estate on death and are not assessed for Inheritance Tax. This has made unused pension wealth an attractive vehicle for passing assets to the next generation, and many people have structured their affairs accordingly.
From 6 April 2027, the value of unused pension funds will be added to the rest of the estate — property, savings, investments and other assets — when HMRC calculates whether Inheritance Tax is owed and at what level.
The government estimates that of around 213,000 estates with inheritable pension wealth in 2027 to 2028, approximately 10,500 will face an Inheritance Tax liability where previously they would not. A further 38,500 estates are expected to pay more than under the current rules. The government's own figures suggest the average Inheritance Tax liability for affected estates will increase by around £34,000 when pension assets are included. These are static projections and do not account for behavioural changes such as accelerated drawdown.
Which pensions are exempt from the new rules?
Not all pension death benefits are caught by the changes. Death in service benefits payable from a registered pension scheme are outside the scope of the new rules, applying to both discretionary and non-discretionary schemes. Dependant's scheme pensions from a defined benefit arrangement, or from a collective money purchase arrangement, are also excluded. The spousal and civil partner exemption applies in full, meaning pension wealth passing to a surviving spouse or civil partner remains exempt from Inheritance Tax.
Who pays the Inheritance Tax on pension wealth?
Following a technical consultation, the government confirmed that personal representatives — the executors of the estate — will be responsible for reporting and paying any Inheritance Tax due on unused pension funds. Where Inheritance Tax is expected, personal representatives can direct pension scheme administrators to withhold up to 50% of taxable pension benefits for up to 15 months from the date of death, allowing time to organise payment before the remaining benefits are released to beneficiaries.
What does this mean for estate planning?
The removal of the pension exemption changes the way unused pension wealth interacts with the rest of an estate, and for some people it will materially alter the Inheritance Tax position they thought they had.
There are a number of legitimate planning considerations that become relevant in light of these changes. Whether to draw down pension funds during a lifetime, how assets are distributed across different vehicles, the structure of existing pension nominations, and the use of lifetime gifting allowances all warrant a fresh look in the context of an updated picture of the estate.
None of these decisions is straightforward. Drawing down pension funds reduces the pot sitting in the pension at death but creates Income Tax liability on the amounts withdrawn above the 25% tax-free entitlement. Gifting reduces the estate but involves its own set of rules, including the seven-year rule for potentially exempt transfers. The right approach depends entirely on individual circumstances — the size of the pension, the composition of the wider estate, income needs in retirement, and family arrangements.
A note on timing
April 2027 gives reasonable lead time, but certain planning options, particularly those involving lifetime gifts or changes to how pension funds are drawn, benefit from being considered well before the deadline rather than close to it.
How Vision Consulting can help
Our team advises individuals, families and business owners on Inheritance Tax planning, financial planning and estate structuring. If you would like a clear picture of how the April 2027 changes affect your position, we are happy to have that conversation.
Call us on 020 8554 2135 or email info@visionconsulting.co.uk