The short answer: from 6 April 2027, unused defined contribution pension pots (SIPPs, personal pensions, most modern workplace pensions) will generally count as part of your estate for inheritance tax. The ongoing dependants' pensions paid by defined benefit (final salary) schemes generally will not. The reason is structural. A DC pension is a pot of money you can leave to a chosen beneficiary, so from 2027 the law treats leftover pot like any other asset you pass on. A DB pension is a promise of income rather than a pot: when you die, the scheme usually pays a reduced pension to your spouse or a dependant, and there is no capital sum to inherit, so there is nothing for inheritance tax to bite on.
This guide covers the whole comparison in one place: what each pension type actually is, exactly which death benefits fall inside and outside the 2027 charge, the exclusions that apply whatever scheme you have, and what it means in practice for your estate. If you already know your pension is a DC pot, you can estimate your household's 2027 exposure in about two minutes with our free calculator. This article is general information for England and Wales (the pension changes themselves apply UK-wide) and is not financial or legal advice.
DB vs DC: the difference in plain English
A defined benefit (DB) pension, also called a final salary or career average pension, promises you a set income for life. The amount is worked out from your salary and years of service, not from investment returns. There is no individual pot with your name on it: the scheme holds one collective fund and pays every member's pension out of it. Most public sector pensions (NHS, teachers, civil service, local government, police) work this way, as do older private sector schemes that have mostly closed to new joiners.
A defined contribution (DC) pension is an actual pot of money. You and your employer pay in, the money is invested, and the pot's value at retirement depends on contributions and investment performance. SIPPs, stakeholder and personal pensions, and virtually every workplace pension opened under auto-enrolment since 2012 are defined contribution. GOV.UK's guide to pension types sets out the two categories.
The inheritance consequence follows directly. Because a DC pot is capital, you can nominate anyone to receive whatever is left when you die. Because a DB pension is an income promise, the scheme rules decide what happens on death, and what usually happens is a reduced ongoing pension (often half or two thirds of yours) paid to a spouse, civil partner or financial dependant. You cannot normally redirect that income to an adult child, and there is no lump of capital to hand over.
What changes on 6 April 2027
Under current rules, most pension death benefits sit outside the estate for inheritance tax, because schemes pay them at their discretion rather than under your will. That changes for deaths on or after 6 April 2027. From that date, most unused pension funds and death benefits will count as part of the estate for inheritance tax, under the government's Inheritance Tax: unused pension funds and death benefits reform announced at Autumn Budget 2024 and legislated since.
The headline mechanics, confirmed in HMRC's policy paper:
- Personal representatives (executors or administrators) become legally responsible for reporting and paying any inheritance tax due on unused pension funds and death benefits, alongside the rest of the estate.
- Death in service benefits paid from registered pension schemes are excluded from the charge.
- Anything passing to a spouse or civil partner remains exempt, exactly as it is for the rest of the estate.
- Beneficiaries can ask the pension scheme to pay tax directly: up to 50% of the pension amount can be withheld by the scheme for up to 15 months to help fund the inheritance tax liability.
- HMRC estimates around 10,500 estates a year become newly liable for inheritance tax, and a further 38,500 pay more than they otherwise would, with an average increase of around £34,000 for those paying more.
Nothing about the reform changes the underlying thresholds. The nil-rate band stays at £325,000 (frozen until 5 April 2031), the standard rate stays 40% (36% where 10% or more of the net estate goes to charity), and the combined married couple threshold can still reach £1,000,000. What changes is what gets counted. Our inheritance tax threshold guide covers how the bands stack, and the inheritance tax pillar covers valuation of the wider estate.
The side-by-side table: what is in and out of scope
| Benefit on death | Typical scheme type | In the IHT net from 6 April 2027? |
|---|---|---|
| Unused pension pot (drawdown funds, uncrystallised funds) | DC (SIPP, personal pension, workplace pot) | Yes, counts as part of the estate |
| Lump sum death benefit paid from a pot | DC | Yes, in scope |
| Dependant's scheme pension (ongoing reduced income to spouse or dependant) | DB (final salary, career average) | No, outside the charge |
| Lump sum death benefit paid by a DB scheme (other than death in service) | DB | Yes, can be in scope |
| Death in service lump sum from a registered pension scheme | Either | No, excluded whatever the scheme type |
| Anything passing to a spouse or civil partner | Either | No tax, spouse exemption applies as normal |
Two caveats stop the table being a complete answer on its own. First, "most DB pensions" is not "all DB pensions". Cash balance schemes and hybrid arrangements sit between the two models: they carry a DB style promise but express it as a capital amount, and what your estate is treated as holding depends on what the scheme would actually pay on death. If your scheme is anything other than a straightforward final salary or career average arrangement, check with the administrator rather than assuming. Second, many people hold both types at once, a DB pension from an old public sector job plus a DC pot from auto-enrolment, and each is assessed on its own terms.
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Death in service: the exclusion people mix up with DB
Death in service is often confused with defined benefit because both are employer promises. It is worth separating them, because the tax treatment turns on the distinction. Death in service is a lump sum, commonly two to four times salary, paid if you die while still employed. Where it is paid from a registered pension scheme, it is excluded from the 2027 charge regardless of whether the employer's pension scheme is DB or DC. So an employee with a workplace DC pot and a four times salary death in service policy could see the unused pot fall into the estate while the death in service lump sum stays outside it. We cover the exclusion in detail in our guide to death in service benefits and IHT from 2027.
Why the distinction changes estate outcomes: a worked comparison
Take two neighbours, each with a house and savings worth £500,000 and each widowed, so no spouse exemption is available on second death and (assuming the house passes to children) the nil-rate band and residence nil-rate band apply in the usual way.
- Neighbour A retired from the NHS with a DB pension of £25,000 a year. On death, the scheme pays nothing further (or a dependant's pension if a dependant survives). The estate for inheritance tax is £500,000, before reliefs. The pension, however valuable it was in life, adds nothing to the taxable estate.
- Neighbour B built up a SIPP and dies after 6 April 2027 with £300,000 still in it. The estate for inheritance tax is now £800,000 before reliefs. At the 40% rate, the pot alone can add up to £120,000 of tax compared with the position before the reform, depending on available nil-rate bands.
Same lifestyle, similar retirement incomes, very different estate outcomes. This is the core of what the 2027 reform does: it makes leftover DC capital taxable in a way DB income promises never were. How the "unused" part of a pot is measured, and what drawing more or less in retirement does to the number, is covered in our companion piece on unused pension pots and inheritance tax from 2027.
What this means in practice
- Find out which type you hold. Your annual statement tells you: a projected income based on salary and service means DB, a pot value and fund list means DC. Many people hold both from different jobs.
- Check your expression of wishes. For DC pots, the nomination form tells the scheme who you would like to benefit. From 2027 the choice also has tax consequences, because pots passing to a spouse or civil partner are exempt while pots passing to others count in the estate.
- Estimate your exposure. The pensions IHT 2027 estimator combines your property, savings and pension figures with the nil-rate bands to show whether the reform is likely to touch your estate at all.
- Tell your executors what you hold. From 2027, personal representatives must report and pay inheritance tax on pensions, so a simple list of schemes and administrators saves them months. Our guide to executor duties and responsibilities explains the wider role, and our pensions and inheritance tax 2027 research hub tracks the data behind the reform.
- Take regulated advice before changing anything. Decisions about drawing, transferring or restructuring a pension have consequences well beyond inheritance tax. This site does not give financial advice; a regulated financial adviser can, and pension transfers from DB schemes in particular are a heavily protected area for good reason.
For the surviving husband, wife or civil partner, the position is gentler under both systems: DB schemes typically continue a reduced pension to a spouse, and DC pots passing to a spouse are exempt from inheritance tax. Our guide for surviving spouses walks through that side, and our hub for pension holders affected by the 2027 changes collects everything on the reform in one place.
Speak to a specialist
If you are unsure which pension types you hold, or your estate combines property, savings and a sizeable DC pot, a conversation with a vetted estate planning specialist can establish where you stand before the 2027 rules arrive. We can connect you with one, and in the meantime the pensions IHT 2027 estimator gives you a free, no-obligation starting figure in a couple of minutes.