From 6 April 2027, unused pension funds and death benefits will be counted as part of a person's estate for inheritance tax. If someone dies on or after that date with money still inside their pension, that money is added to everything else they owned, measured against the nil-rate band of £325,000 and any other allowances, and taxed at 40% on the excess (36% where 10% or more of the net estate goes to charity). Pensions passing to a spouse or civil partner remain exempt, and death in service benefits from registered pension schemes are excluded from the charge.
The change, confirmed by the government in its Inheritance Tax on pensions: liability, reporting and payment policy package, ends the long-standing position where most defined contribution pension pots sat outside the IHT net entirely. HMRC estimates around 10,500 estates each year will become liable for inheritance tax for the first time, and a further 38,500 will pay more than they otherwise would, with an average increase of around £34,000 for those paying more. If you want a personal figure rather than the headline numbers, our free pensions IHT 2027 estimator works out your estate's likely exposure under the new rules in about two minutes.
This guide covers what "unused" actually means, how the current rules compare with the 2027 position, who has to report and pay, and how inheritance tax interacts with the separate income tax rules that depend on whether death occurs before or after age 75. It is written with England and Wales probate terminology, though inheritance tax itself applies UK wide. Nothing here is personal tax, legal or financial advice, and we do not recommend pension products or transactions.
What does "unused pension pot" actually mean?
The phrase sounds vague, but it has a reasonably clear shape. An unused pension fund is, broadly, money still inside the pension wrapper when the holder dies:
- Uncrystallised funds. A pot the person never touched: no lump sum taken, no drawdown started, no annuity bought. The whole pot is unused.
- Undrawn drawdown balances. Someone who moved into flexi-access drawdown and took some income, but died with £200,000 still invested, leaves £200,000 of unused funds. Money already withdrawn is simply part of their ordinary estate (bank accounts, investments) and was always within IHT.
- Most lump sum death benefits. Lump sums paid out by the scheme on death are generally within the new charge, whether paid to named beneficiaries or at the scheme's discretion.
What is not caught matters just as much:
| Within the 2027 IHT charge | Outside the 2027 IHT charge |
|---|---|
| Uncrystallised defined contribution pots (SIPPs, workplace DC schemes, personal pensions) | Death in service benefits from registered pension schemes |
| Unused drawdown funds | Ongoing dependants' scheme pensions from defined benefit schemes |
| Most lump sum death benefits from registered schemes | Pension income already drawn and spent during life (never in a pension at death) |
| Funds passing to anyone other than a spouse, civil partner or charity | Funds passing to a spouse or civil partner (spouse exemption) or to charity (charity exemption) |
Defined benefit (final salary) schemes mostly pay an ongoing pension to a dependant rather than a transferable pot, which is why they largely fall outside the new charge, though lump sum death benefits from DB schemes can be caught. The DB and DC distinction has enough moving parts that we cover it separately in our guide to DB vs DC pensions and inheritance tax.
The current rules vs the 2027 rules
Under the rules that apply to deaths before 6 April 2027, most modern pensions escape inheritance tax because death benefits are paid at the discretion of the scheme trustees or administrator. Because the member cannot legally compel the scheme to pay a particular person, the funds are treated as outside their estate. Your expression of wishes form guides the trustees, but does not bind them, and that discretion is what keeps the money out of IHT. The full picture of how discretion, nominations and the age 75 test work today is in our companion guide to the current tax rules on pension death benefits.
From 6 April 2027, that discretion no longer shields the funds from inheritance tax. The pension value is aggregated with the rest of the estate, and the estate's allowances are applied across the whole:
- The nil-rate band of £325,000 per person, frozen until 5 April 2031.
- The residence nil-rate band of up to £175,000 where a home passes to direct descendants, tapered by £1 for every £2 of estate value above £2,000,000. Because pension funds now count towards that £2,000,000 measure, some estates will lose residence nil-rate band purely because a pension has been added to the total.
- Transferable allowances between spouses and civil partners, giving a couple up to £1,000,000 combined.
Anything above the available allowances is taxed at 40% (36% with the charity reduction). The inheritance tax pillar guide walks through how those bands stack in the general case; the point specific to 2027 is simply that pension money joins the calculation for deaths on or after that date. Our pensions and inheritance tax 2027 research page sets out the underlying HMRC impact data in full.
The income tax interaction: the age 75 rule still applies
Inheritance tax is not the only tax in play, and the 2027 reform does not replace the existing income tax rules on inherited pensions. Two regimes now sit side by side, and they are tested at different points:
- Death before age 75. Beneficiaries can generally draw the inherited pension free of income tax, within the relevant allowances, under the rules set out in HMRC's guidance on tax on pension death benefits. From April 2027 the pot may still have suffered inheritance tax on the way in, but withdrawals themselves are income tax free.
- Death at or after age 75. Beneficiaries pay income tax at their own marginal rate on money they draw from the inherited pension. From April 2027 this sits on top of any inheritance tax already charged on the fund. A pot that bears 40% IHT and is then drawn by a higher rate taxpayer suffers income tax at 40% on the remainder, an effective combined rate of 64% on that slice, rising further for additional rate taxpayers.
We state that combined effect factually because it is arithmetic, not advice. Whether and how anyone should respond to it depends entirely on personal circumstances, and decisions about pensions should only ever be made with regulated financial advice.
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Who reports and pays: the new duty on personal representatives
This is the part of the reform most coverage skips, and the part that matters most if you are the one administering the estate. Under the final design, personal representatives (the executors named in the will, or administrators under intestacy) are legally responsible for reporting the pension values to HMRC and paying any inheritance tax due on unused pension funds and death benefits. The government originally proposed making pension scheme administrators liable, then switched liability to personal representatives after consultation, as recorded in the consultation outcome.
In practice, an executor dealing with a death on or after 6 April 2027 will need to:
- Identify every pension the deceased held, including old workplace schemes and dormant personal pensions.
- Obtain date-of-death valuations of unused funds and death benefits from each scheme administrator.
- Include those values in the estate's inheritance tax account alongside property, savings and other assets.
- Calculate the IHT attributable to the pension element and arrange payment, using the scheme withholding mechanism where needed.
- Keep beneficiaries informed, since the tax position affects what they ultimately receive and, post 75, what income tax they will pay on it.
This is a genuine addition to the executor's existing workload, which already includes valuing the estate, applying for probate and settling debts. If you are taking on the role, our guide to executor duties and responsibilities covers the full duty set, and our executors hub collects everything in one place.
How the bill gets paid when the money is inside a pension
The obvious objection to the new regime is practical: inheritance tax is normally due by the end of the sixth month after the month of death, and much of it before probate is granted, yet the taxable value here is locked inside a pension scheme. The rules address this directly. A pension scheme can withhold up to 50% of the pension amount for up to 15 months so that funds remain available to meet the inheritance tax attributable to the pension, and personal representatives can arrange for tax to be paid to HMRC from the pension itself before the balance is released to beneficiaries.
That mechanism means executors should not normally be forced to sell the family home or other estate assets purely to cover pension IHT. It does, however, add coordination work: the executor, the scheme administrator and HMRC all need consistent figures, and beneficiaries may wait longer for pension money than they would have under the pre-2027 system, where schemes often paid out within weeks.
Who is likely to be affected
HMRC's own impact estimates give the clearest picture of scale. Out of roughly 640,000 UK deaths a year, the government expects around 10,500 estates to become liable for inheritance tax for the first time as a result of including pensions, and around 38,500 estates to pay more IHT than they otherwise would, with an average increase of about £34,000 for that second group. Most estates will still pay no inheritance tax at all, because the combined allowances of up to £1,000,000 for a couple continue to shelter the majority of family estates.
The people most exposed are broadly: single people and unmarried couples with meaningful pension savings (no spouse exemption), homeowners whose house plus pension pushes the estate past the frozen £325,000 and £175,000 bands, and larger estates near the £2,000,000 residence nil-rate band taper point, where adding a pension can remove allowance as well as add taxable value. If any of that sounds like your situation, the pension holders 2027 hub brings together the whole reform picture, and the wider context sits in our full guide to the 2027 pension IHT reform.
Speak to a specialist
The 2027 rules turn pensions from an afterthought into a central part of estate administration, and they land a new legal duty on executors at an already difficult time. If you are planning ahead, or administering an estate where pension funds are significant, we can connect you with a vetted probate or estate planning specialist for a no-obligation conversation. Before you do, run your own numbers through our free pensions IHT 2027 estimator to see whether the change is likely to touch your estate at all.