April 2027 — when pensions enter Inheritance Tax
Quick answer: From 6 April 2027 most unused defined contribution pension funds will fall within Inheritance Tax for the first time.
From 6 April 2027 most unused defined contribution pension funds will fall within Inheritance Tax for the first time. This is the single biggest change to UK pension and estate planning in over a decade.
Last reviewed:
Primary source: https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment
What changes on 6 April 2027
Currently, most defined contribution pensions sit outside the estate. If you die before 75 the pot passes tax-free to your beneficiaries; if after 75 they pay only Income Tax at their marginal rate on withdrawals.
From 6 April 2027 the value of unused DC pension funds (and most lump sum death benefits) becomes part of the estate for IHT purposes. If the estate is above the £325,000 nil-rate band, that pension value is taxed at 40%.
If you die after 75, beneficiaries still pay Income Tax on withdrawals — on top of the IHT already charged on the same pot.
Who is and is not affected
Affected: most people with a defined contribution pension (SIPP, personal pension, workplace DC pension) whose total estate is above the IHT allowances.
Not affected by this rule directly: spouse / civil partner inheritance (spouse exemption still applies) and most defined-benefit pensions paid as a continuing income to a dependant.
Charity exemptions still apply — pensions left to charity remain IHT-free.
Common planning responses
Spend pensions first: the conventional 'spend ISAs last because pensions are IHT-free' logic reverses for many people from 2027 onwards.
Lifetime gifting: gifts made more than 7 years before death fall outside the estate. From 2027, some retirees will draw down faster and gift the proceeds.
Whole-of-life insurance written in trust: a separate policy paying out to cover the predictable IHT bill on a pension.
Review your nominated beneficiaries — especially if you are not married and want to use any spouse-type exemptions before 2027.
Common questions
- Does the 25% tax-free lump sum still work?
- Yes. Up to £268,275 of tax-free cash across all pensions remains available. The change applies to what is left in the pension at death, not to lifetime withdrawals.
- Is this definitely happening?
- It was confirmed in the 2024 Autumn Budget and reaffirmed in subsequent statements. Effective date is 6 April 2027. Implementation details (e.g. how schemes report values to HMRC) are still being finalised.
- Should I take everything out of my pension now?
- Usually not. Pension withdrawals beyond the 25% lump sum are taxed at Income Tax rates that often exceed 40%. Trigger the Money Purchase Annual Allowance and you cap future contributions at £10,000. Decisions should consider the whole picture, including your spouse, your other assets and your lifespan assumptions.