From 6 April 2027, most unused pension funds and pension death benefits will count towards a deceased person’s estate for Inheritance Tax. The change is set out in Finance Act 2026. Families will need to consider pension wealth alongside other assets when reviewing an inheritance plan.
Information checked on 3 October 2026. This article covers a confirmed 2027 tax change, rather than an increase in the State Pension.
The date of death determines which rules apply
The reform applies to deaths on or after 6 April 2027. If a member dies before then, a later payment does not itself bring the benefit under the new rules. HMRC confirms this distinction in its technical note.
What is changing?
Many benefits from discretionary schemes, where trustees decide who receives them, have previously fallen outside the estate for IHT. Most will now be included. That does not mean every inherited pension produces a tax bill: the estate’s value, available allowances and exemptions still matter.
HMRC’s policy explanation identifies exclusions, including qualifying death-in-service benefits and certain dependants’ scheme pensions. Ask the administrator for the precise benefit type and how it will be treated.
Does the family lose 40% of the whole pension?
That headline can be misleading. The basic IHT threshold is £325,000, and the standard 40% rate applies to the taxable amount above the available threshold. Other allowances or exemptions may apply, including those involving a spouse or civil partner and a qualifying home left to descendants. An unmarried partner is not automatically a spouse or civil partner. GOV.UK explains IHT allowances.
For a simplified calculation, assume £300,000 of other estate assets and £100,000 of pension wealth brought into account. With only a £325,000 allowance and no other reliefs, relevant debts or gifts, the amount above the threshold is £75,000. At 40%, the tax is £30,000. A real family’s position can be very different.
Who will handle the tax?
Personal representatives administering the estate will be responsible for reporting and paying IHT. Beneficiaries can also be liable for tax attributable to their benefits. Families should not assume the pension provider handles the entire calculation. HMRC sets out the responsibilities.
An organised pension record will help those dealing with the estate: list scheme administrators, membership references and contact details. Keep it securely with information about where your will can be found. There is no need to include account passwords.
IHT and Income Tax are separate
Income Tax on inherited pension payments also depends on the benefit type, the member’s age at death and other conditions. Some payments following death below age 75 can be tax-free; payments following death at 75 or over are usually subject to Income Tax. These are separate rules from IHT. Check the current Income Tax guidance.
The reform provides an adjustment so the amount corresponding to IHT borne on the benefit is not also treated as the beneficiary’s taxable income. Do not simply add two headline rates together. Our Income Tax 2026/27 guide explains the current income-tax context; it does not present those figures as new 2027/28 rates.
What can you organise before April 2027?
- List every pension, including those from former employers.
- Review beneficiary nominations and contact details.
- Ask each administrator which death benefits the scheme provides.
- For a substantial estate, review your arrangements with a tax adviser and solicitor.
- Before withdrawing or transferring savings, assess the consequences for retirement income and taxation.
The reform alone does not tell you whether an early withdrawal is sensible. Gather the facts first and compare options for your circumstances. Families with connections to Poland and the UK may need advice covering both systems.
What still needs checking before publication?
The main rule and start date are confirmed in legislation. HMRC plans further operational guidance before implementation. Review the latest guidance and secondary legislation before publishing; planned forms and tools are not described here as services already available.