Here is the change in one sentence. From 6 April 2027, money left sitting in your pension when you die will usually count as part of your estate for inheritance tax, which it currently does not.
That is the whole headline. If your total estate, now including the pension, stays under the tax-free allowances (starting at £325,000, and up to £1,000,000 combined for many married couples and civil partners), there is still no inheritance tax to pay. If it goes over, the part above the allowances is taxed at 40%, and pensions no longer escape that calculation. Nothing changes at all for pensions left to a spouse or civil partner, because they are exempt. If you want a quick sense of whether the change touches you, the pensions and IHT 2027 estimator works it out in about two minutes.
This guide assumes no prior knowledge. It applies to England and Wales (the inheritance tax rules described are UK-wide, though probate works differently in Scotland). It is information, not financial or legal advice.
First, the basics: what is an estate, and what is inheritance tax?
When someone dies, everything they owned is added up. The house, savings, car, investments, minus any debts. That total is called the estate.
Inheritance tax (IHT) is a tax on estates above a certain size. Everyone gets a tax-free allowance of £325,000, called the nil-rate band, which is frozen until 5 April 2031. If you leave your home to children or grandchildren there can be an extra allowance of up to £175,000, the residence nil-rate band. Married couples and civil partners can pass unused allowances to each other, which is how the combined figure of up to £1,000,000 arises. Anything above the allowances is taxed at 40% (or 36% where 10% or more of the net estate goes to charity), per gov.uk's inheritance tax guidance. Our plain guide to the inheritance tax threshold walks through the allowances properly.
The key point for this article: for years, one big asset has been left out of that adding-up exercise entirely. The pension.
Why pensions have been outside the net until now
Think of your estate as a suitcase you leave behind. Everything in the suitcase gets weighed for inheritance tax. For decades, your pension has travelled as separate hand luggage that never went on the scales.
The technical reason is that most modern pensions are held in a form of trust, and the pension scheme usually has discretion over who receives the money when you die. Because the money was never quite "yours" in the legal sense that your bank account is, it sat outside your estate. In practice, this meant a person could die with a £900,000 house and savings and a £500,000 pension, and only the £900,000 was weighed. See gov.uk's guidance on tax when you inherit a private pension for how the current rules work.
The government's view, set out when the change was announced, is that this turned pensions into a wealth-transfer wrapper as much as a retirement product, with some people deliberately spending other savings first and preserving the pension to pass on tax free. From 6 April 2027, the hand luggage goes on the scales with everything else.
Exactly what changes on 6 April 2027
For deaths on or after 6 April 2027, most unused pension funds and death benefits will be included in the value of the estate for inheritance tax, under the framework in HMRC's policy paper Inheritance Tax: unused pension funds and death benefits. "Unused" simply means money still sitting in the pension that you had not spent. There is no new tax rate and no separate pension tax. The pension is simply added to the pile before the ordinary inheritance tax sums are done.
Here is the before and after at a glance:
| Question | Death before 6 April 2027 | Death on or after 6 April 2027 |
|---|---|---|
| Does unused pension money count in the estate for IHT? | Usually no | Usually yes |
| Pension left to spouse or civil partner | No IHT | No IHT (spouse exemption applies) |
| Death in service lump sum from a registered scheme | Usually outside IHT | Still excluded from the charge |
| Who deals with any IHT on the pension? | Not applicable for most estates | The personal representatives (executors) |
| IHT rate above the allowances | 40% (36% with 10%+ to charity) | 40% (36% with 10%+ to charity), unchanged |
Two carve-outs are worth repeating because they reassure a lot of readers:
- Spouses and civil partners. Anything left to a spouse or civil partner is exempt from inheritance tax, and from 2027 that applies to pensions exactly as it applies to the house. If this is your situation, our guide for surviving spouses covers what actually happens in practice.
- Death in service benefits. Lump sums paid by registered pension schemes because you died while employed are excluded from the new charge.
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Does this affect me? A rough self-check
Work through three questions:
- Add up everything you own, including, from 2027, your pension pot. House, savings, investments, pension, minus mortgage and debts.
- Compare it with your allowances. £325,000 for an individual, potentially plus £175,000 for a home left to direct descendants, and potentially doubled for a married couple or civil partners, up to £1,000,000 combined.
- Think about who inherits. Everything passing to a spouse or civil partner is exempt regardless of size. The change mainly bites when wealth passes to children or others, typically on the second death in a couple.
If your total including the pension is comfortably under the allowances, this reform is unlikely to cost your family anything. If the pension is what pushes you over, you are exactly who the change affects. HMRC's own estimates give a sense of scale: around 10,500 estates a year are expected to pay inheritance tax for the first time because of the change, and a further 38,500 will pay more, by around £34,000 extra on average. Those are national estimates, not certainties for any one family, and most estates will still pay no inheritance tax at all. Our pensions and inheritance tax 2027 research page sets out the numbers behind the reform in full.
How does the tax actually get paid if the money is locked in a pension?
This is the practical question almost nobody explains, and it confuses people for a good reason. Inheritance tax normally has to be settled before the family can get full access to the estate, yet the biggest new taxable asset is sitting inside a pension wrapper.
Two things to know:
- Your personal representatives are responsible. The executors named in your will (or administrators if there is no will) become legally responsible for reporting the pension to HMRC and paying any inheritance tax due on it. Pension schemes will give them the figures; our companion guide on getting pension information from providers after a death covers that process step by step.
- The pension itself can fund the bill. The rules allow up to 50% of the pension amount to be withheld by the scheme for up to 15 months so the tax can be paid from the pension money rather than the family having to find cash elsewhere. Exact mechanics vary between schemes, and waits vary.
One more thing executors and families should know: inheritance tax and income tax are different taxes, and both can apply to the same pension. If the person died at age 75 or over, beneficiaries generally pay income tax at their own rate when they draw the inherited pension money. That income tax rule is not new, but from 2027 it sits alongside the new inheritance tax treatment.
What can I sensibly do before 2027?
Without straying into financial advice, three low-key steps make sense for almost everyone:
- Find out what your pensions are worth. Many people have two or three forgotten pots. You cannot judge whether this affects you without a rough total.
- Check your death benefit nominations. Every pension lets you nominate who should receive it. Given the spouse exemption, who you nominate now carries a tax consequence it did not before.
- Run the numbers, then take advice if they are big. If your estate including pensions is clearly above the allowances, a regulated financial adviser or estate planning specialist can talk through options. Decisions about contributing to, moving or drawing a pension are regulated territory and not something to act on from a blog post alone.
For deadlines and the sequence of events between now and April 2027, see the timeline of key dates, and for a more detailed account of the mechanics, the full guide to the 2027 pension IHT changes picks up where this explainer stops. Pension holders planning ahead will also find the dedicated pension holders 2027 hub useful.
Speak to a specialist
If your estate including pensions looks like it may cross the inheritance tax allowances, a conversation with a vetted estate planning or probate specialist is worth far more than worry. We can connect you with one, and in the meantime the pensions and IHT 2027 estimator will give you a clear, personal starting point in a couple of minutes. This article is general information about the rules in England and Wales and is not legal, tax or financial advice.