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For decades, pensions have been a kind of tax-free attic — somewhere to stash wealth that your family could collect later, completely outside of inheritance tax.
From 6 April 2027, HMRC is moving that attic inside the house.
Under new rules set out in the draft Finance Bill 2025–26, unused pension pots will be included in your estate for inheritance tax (IHT) purposes. If your combined estate — property, savings, investments, and now your pension — exceeds the tax-free thresholds, your family could face a 40% tax bill on the excess.
How big a difference are we talking about?
Let’s use a real-style example (these are the figures used by The People’s Pension to illustrate the change):
Emily, 73, has a defined contribution pension worth £700,000 and other assets worth £800,000.
| Before April 2027 | After April 2027 | |
| Estate value for IHT | £800,000 | £1,500,000 |
| Tax-free allowance (nil-rate band) | £325,000 | £325,000 |
| Taxable amount | £475,000 | £1,175,000 |
| IHT bill at 40% | £190,000 | £470,000 |
That’s an extra £280,000 in tax. Same person, same assets — just a rule change.
Why is this happening?
The government says pensions were designed to fund your retirement, not to be used as a tax-free way of passing wealth to the next generation. The “pension freedoms” introduced in 2015 made it easy to leave unused pension pots to family members without IHT — and more people started doing exactly that, treating pensions as inheritance planning tools rather than retirement income.
The April 2027 change closes that loophole.
The double-tax problem
Here’s where it gets particularly uncomfortable. If you die after age 75, your pension beneficiaries already pay income tax on any money they draw from the inherited pension. After April 2027, IHT will apply on top.
That means a higher-rate taxpayer inheriting a pension could face a combined effective tax rate of over 60% on the same pot. Think of it like paying a toll to get onto a bridge, and then being charged again at the other end.
What’s still protected
Not everything changes:
- Spouse or civil partner exemption — pensions passed to a surviving spouse or civil partner remain IHT-free, just like other assets.
- Charity exemption — pension funds left to a UK-registered charity are exempt from IHT.
- Defined benefit pensions — regular income payments from a DB pension are not a “pot” and are not subject to IHT.
- State Pension — unaffected (there’s no pot to pass on).
Five things to do before April 2027
- Review your expression of wishes — this is the form that tells your pension provider who you’d like to receive your pension when you die. With the new rules, it may be more tax-efficient to nominate your spouse rather than your children.
- Review your will — your will and your pension nomination need to work together as part of one joined-up plan. They can’t be looked at in isolation anymore.
- Think about the order you spend your money — if your pension is no longer sheltered from IHT, it may make sense to draw from it earlier and preserve other assets like ISAs. This is a conversation to have with a financial adviser.
- Consider lifetime gifting — gifts made more than seven years before death fall outside IHT. Regular gifts from surplus income are exempt immediately.
- Talk to your family — the earlier you have these conversations, the better the planning. Nobody likes talking about death and taxes, but the cost of not talking can be £280,000.
This isn’t something to panic about — but it is something to plan for. If you’d like a friendly, no-pressure chat about how the changes might affect your family, we’re here. We are an estate planning company and we speak plain English, not tax jargon.
This article is for general information only and does not constitute legal, tax, or financial advice. The pension IHT changes are based on the draft Finance Bill 2025–26 and remain subject to parliamentary approval. Tax rules can change, and their effect depends on your personal circumstances. For advice specific to you, please consult a qualified financial adviser or tax professional.
Sources:
- GOV.UK: Inheritance Tax — unused pension funds and death benefits – GOV.UK
- The People’s Pension: Inheritance tax (IHT) changes on pensions from 6 April 2027 – People’s Pension
- Draft Finance Bill 2025-26: Finance Bill 2025-26 — draft legislation and technical tax documents – GOV.UK
