Currently most unused pensions sit outside your estate and escape inheritance tax. But from 6 April 2027, unused defined contribution pensions will be brought within the inheritance tax net, so larger pots left on death could face 40% IHT, on top of any income tax your beneficiaries pay.
The short answer
- Until April 2027, most unused pensions sit outside your estate and escape inheritance tax.
- From 6 April 2027, unused DC pensions are counted within the estate and taxed at 40% above the bands.
- Anything left to a spouse or civil partner stays IHT-free before and after the change.
For now, pensions are one of the most inheritance-tax-efficient ways to pass on wealth in the UK, most unused pots fall outside your estate entirely. That is about to change. From 6 April 2027, unused defined contribution pension funds will be counted as part of your estate for inheritance tax, one of the biggest shifts in pension planning for a generation. Whether your own pension is caught depends on its size, who inherits it, and when you die.
The position today
Under the rules in place until April 2027, a defined contribution pension, a workplace scheme, personal pension or SIPP, normally sits outside your estate for inheritance tax. Because the pot is held in trust by the scheme and paid out at the discretion of the trustees, it is not treated as your property on death. That is why advisers have long encouraged people to spend other savings first and leave pensions untouched: the fund could pass to heirs free of the 40% charge that applies above the nil-rate bands.
The inheritance tax thresholds themselves are frozen. Everyone has a £325,000 nil-rate band, and a further £175,000 residence nil-rate band applies when a main home passes to direct descendants, potentially £1 million for a married couple or civil partners combining both allowances. Anything above the available bands is taxed at 40%. These figures are frozen until 2030, so as asset values rise, more estates are dragged into the net. Our complete guide to inheritance tax planning sets out how the bands fit together.
What changes on 6 April 2027
From that date, unused pension funds and most lump-sum death benefits will be brought within the value of your estate for inheritance tax. In practice, the pension scheme administrator and your executors will have to account for the pot alongside your house, savings and investments, and any value above the available nil-rate bands will be charged at 40%. It will not matter that the money is inside a pension, for inheritance tax purposes it becomes simply another asset you owned.
Pensions and inheritance tax: before and after April 2027
| Until 5 April 2027 | From 6 April 2027 | |
|---|---|---|
| Unused DC pension | Normally outside the estate | Counted within the estate |
| Rate above nil-rate bands | 0%, effectively IHT-free | 40% |
| Left to spouse or civil partner | IHT-free | Still IHT-free (spouse exemption) |
| Beneficiary income tax | Depends on age at death | Unchanged, depends on age at death |
One crucial exemption survives intact: anything you leave to a surviving spouse or civil partner remains free of inheritance tax, pension or otherwise. So a pension passing to a husband, wife or civil partner is not caught. The charge bites where larger pots pass to children, grandchildren or other beneficiaries and the estate has already used up its nil-rate bands.
The income tax that comes on top
Inheritance tax is only half the story, because pensions can also carry an income tax charge for the people who inherit them, and that rule is not changing. If you die before age 75, your beneficiaries can usually draw the inherited pension free of income tax. If you die at 75 or older, they pay income tax at their own marginal rate on whatever they withdraw. From 2027, a large pot left to an adult child could therefore be hit by inheritance tax at 40% and income tax on the remainder, a combined burden that, at worst, leaves relatively little of the original fund.
Heavier combined tax after 2027
- A large unused pot left to adult children
- Death at 75 or over, adding income tax on withdrawals
- An estate already above its nil-rate bands
- Leaving everything to non-exempt beneficiaries
Ways it stays lighter
- Pensions left to a spouse or civil partner (still exempt)
- Death before 75, so no beneficiary income tax
- An estate within the £325k plus £175k bands
- Spending pension income and gifting from other assets
What you can do about it
The 2027 change rewards a fresh look at the order in which you spend and pass on your wealth. For years the standard advice was to preserve the pension and spend everything else; for some people that logic now reverses. Options worth discussing with an adviser include drawing more pension income during your own lifetime, using your tax-free cash, making regular gifts out of surplus income, and reviewing your expression-of-wishes form so the right people inherit in the most efficient way. Our guide on how to reduce inheritance tax legally covers the gifting rules in detail.
- 1
Check your expression of wishes
Make sure your nominated beneficiaries are up to date, a spouse inherits free of IHT, so who you name genuinely matters.
- 2
Model your income differently
It may now make sense to draw pension income earlier and preserve non-pension assets, reversing the old rule of thumb.
- 3
Use your gifting allowances
Regular gifts out of surplus income, plus the annual exemptions, can move wealth out of your estate over time.
- 4
Take advice before 2027
The rules are complex and every estate differs, regulated advice can model the combined income tax and IHT effect.
The double-tax trap after 2027
From April 2027 a pension left to a non-exempt beneficiary could face 40% inheritance tax and then income tax on withdrawals if you die at 75 or over. On a large pot the effective rate can be severe, which is exactly why the order in which you spend your assets is being rethought.
None of this should prompt a rushed decision: the change does not take effect until April 2027, and spouses remain fully exempt throughout. But it does make a review worthwhile, especially for anyone with a sizeable pot they had earmarked purely for the next generation. This is information, not personal advice, and the detail may yet be refined before the rules start. Vetted Wealth’s free service matches you with independently vetted, FCA-regulated pension advisers who can model your position, and you can read the fuller picture in our guide to pensions and inheritance tax or across the wider pensions guides.
In summary
- Until April 2027, most unused pensions sit outside your estate and escape inheritance tax.
- From 6 April 2027, unused DC pensions are counted within the estate and taxed at 40% above the bands.
- Anything left to a spouse or civil partner stays IHT-free before and after the change.
- Die at 75 or over and beneficiaries also pay income tax on withdrawals, a possible double hit.
- A review of how you spend, gift and nominate beneficiaries is worthwhile well before 2027.
Sources and further reading
- Pension basics MoneyHelper
- Workplace pensions guidance The Pensions Regulator
- Find pension contact details GOV.UK
Read the full guide
For the complete picture, see our in-depth guide: Pensions and Inheritance Tax: The 2027 Changes.
Speak to a vetted pension advice 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.
