You can’t simply avoid it, but you can plan. Keep beneficiary nominations up to date, consider spending or gifting other assets first, use the spouse exemption, and review beneficiary drawdown. From April 2027 unused pensions fall into the estate, so revisiting your whole plan matters.
The short answer
- You cannot simply avoid inheritance tax on a pension, but nominations, sequencing and exemptions reduce it.
- Keep your expression-of-wishes form up to date, it directs where death benefits go.
- The spouse exemption still applies; couples can defer the tax and plan the passing to children together.
Let’s be clear up front: there is no trick that makes a pension vanish from an inheritance tax calculation, and anything promising to “avoid” tax outright deserves suspicion. What you can do is plan sensibly so your pension passes as efficiently as the rules allow, especially with unused pensions due to enter the estate from April 2027. Good planning is about sequencing, nominations and using the exemptions that already exist, the same unglamorous levers that quietly move real money, applied consistently over the years before they are needed rather than in a rush at the end.
Practical steps that help
Most of the value comes from a handful of straightforward actions, reviewed regularly rather than set once and forgotten.
- 1
Keep beneficiary nominations current
Your pension scheme pays death benefits at the trustees’ discretion, guided by your expression-of-wishes form. An out-of-date form is one of the most common, and most avoidable, planning failures.
- 2
Use the spouse exemption
Anything passing to a husband, wife or civil partner remains exempt, so couples can leave pots to each other and defer the question, planning the eventual passing to children together.
- 3
Think about the order you spend assets
With pensions entering the estate in 2027, it may make sense to draw on other savings first in some cases, or the reverse in others. The right sequence depends on your age, income needs and the size of your estate.
- 4
Consider gifting from other assets
Money withdrawn from a pension can be gifted, after which the usual reliefs and the seven-year rule apply. Regular gifts out of surplus income can be immediately exempt.
- 5
Review beneficiary drawdown
Rather than taking a lump sum, beneficiaries can often keep an inherited pot in drawdown, controlling when and how much income tax they pay on withdrawals.
Why 2027 changes the maths
Until then, most unused defined-contribution pensions sit outside your estate. From April 2027 they are expected to be counted for inheritance tax, so a pot that once passed untouched could be taxed at 40% above your allowances, and if you die after 75, your beneficiaries may also pay income tax on withdrawals. That combination is exactly why revisiting your plan now is worthwhile. Our guide to how pensions are taxed on death explains the interaction, and it is worth checking how much you can still contribute tax-efficiently in our answer on paying into a pension tax-free.
Sequencing: the quiet lever
The single biggest planning decision is often the order in which you draw on your assets in retirement. Historically, leaving the pension untouched and spending ISAs and savings first passed the most wealth on tax-free. With pensions entering the estate from April 2027, that calculus shifts, but not uniformly. If you die after 75, beneficiaries pay income tax on pension withdrawals on top of any inheritance tax, so a very large pot inherited by a higher-rate taxpayer can be taxed heavily twice. For some families it now makes sense to draw the pension earlier and gift from the proceeds; for others, preserving it still wins. Only a full model of your own numbers settles it.
Reliefs and exemptions that still work
Away from the pension itself, the familiar inheritance tax reliefs remain available and can shelter the wealth you release. Each person has a £3,000 annual gift exemption, small gifts of up to £250 per recipient, and generous exemptions for wedding gifts. Most powerfully, regular gifts out of surplus income, payments made from income without reducing your standard of living, can be immediately exempt, with no seven-year wait. Money taken from a pension and given away this way can steadily reduce a future estate, though careful records are essential to satisfy HMRC, a simple spreadsheet showing income in, expenditure out and the gifts made from the surplus is usually enough to demonstrate the pattern your executors will need to prove.
For larger estates, trusts, life cover written in trust, and business or charitable reliefs may also feature. These are more complex and carry their own rules and costs, so they belong in a properly constructed plan rather than a piecemeal fix, and they are best set up well before they are needed. The inheritance tax hub gathers the relevant guides in one place if you want to read further.
None of this is one-size-fits-all. Drawing pensions down faster to reduce an estate can create an income tax bill that outweighs the inheritance tax saved, so the numbers must be modelled for your situation. This is information, not personal advice, and investments can fall as well as rise. A vetted, FCA-regulated adviser, matched to you free through Vetted Wealth via our inheritance tax planning service, can weigh the trade-offs precisely.
In summary
- You cannot simply avoid inheritance tax on a pension, but nominations, sequencing and exemptions reduce it.
- Keep your expression-of-wishes form up to date, it directs where death benefits go.
- The spouse exemption still applies; couples can defer the tax and plan the passing to children together.
- From April 2027 unused pensions enter the estate, so model income tax and inheritance tax together before acting.
Sources and further reading
- Inheritance Tax GOV.UK
- Inheritance Tax: residence nil rate band GOV.UK
- Trusts and taxes GOV.UK
Read the full guide
For the complete picture, see our in-depth guide: How Pensions Are Taxed on Death.
Speak to a vetted inheritance tax planning specialist
This is free information, not personal advice. When you’re ready, we’ll match you with an independently vetted, FCA-regulated specialist, free, and with no obligation.
