For years, a defined contribution pension has been one of the most tax-efficient things you could leave behind. Unused funds generally sat outside your estate for inheritance tax (IHT) purposes, which meant many people chose to spend other savings first and leave their pension untouched for the next generation.
That is about to change. Under legislation now enacted in the Finance Act 2026, most unused pension funds and pension death benefits will form part of your estate for IHT purposes where the death occurs on or after 6 April 2027.
If you have a pension pot, and particularly if your estate is already close to or above the IHT thresholds, this is worth understanding now rather than after the rules come into force.
What Is Changing for Pensions and Inheritance Tax in April 2027?
Until now, unused defined contribution funds have usually passed to beneficiaries outside the estate, often free of IHT. From 6 April 2027, most of these funds will be counted alongside your home, savings and investments when working out whether IHT is due.
Where the total value of the estate exceeds the available allowances, the standard rate of 40% will apply to the excess, in the same way as for any other asset. It’s worth noting that tax will not necessarily be due: the nil-rate band, the residence nil-rate band and the exemption for transfers to a spouse or civil partner all continue to apply.
One point to note, however, is that death-in-service benefits paid from registered pension schemes are expected to remain outside the scope of the new charge, following the government’s consultation response.
Will Your Pension Be Taxed Twice? Inheritance Tax and Income Tax Explained
Many people worry that pension savings could be taxed twice. For deaths after age 75, beneficiaries have always paid income tax on money drawn from an inherited pension at their own marginal rate, and that will continue alongside the new IHT charge.
The government has confirmed, however, that income tax will not be charged on the part of the pension used to pay the IHT bill, and HMRC has said it will develop a mechanism to refund any overpayments where both taxes are paid on the same benefits. Where death occurs before 75, unused funds passing to beneficiaries are usually still free of income tax, although they will now be exposed to IHT.
Who Pays the Inheritance Tax on a Pension? The Role of Executors
This is where the changes become a practical issue for estate administration. Under the current plans, it will be the personal representatives (the executors or administrators) who are responsible for reporting and paying any IHT due on pension funds. Pension schemes will be expected to provide the value of unused benefits within a short window after being notified of the death, but the legal responsibility sits with the person administering the estate.
In some circumstances the scheme itself may be able to pay the tax directly from the pension, but that is not guaranteed in every case, and personal representatives could find themselves needing to pay an IHT bill before they have access to the funds that created it.
For families, this adds another layer of complexity to an already demanding process. For executors, it makes it more important than ever to understand exactly what pension arrangements the person who has died actually held, and where those arrangements stand.
How to Prepare Your Will and Estate Plan Before April 2027
Although the new rules only apply to deaths on or after 6 April 2027, the planning needs to start sooner. Some points to think about:
- Review your Will. If your estate plan was built on the assumption that pensions sat outside your estate, the amounts passing under your Will, and the IHT bill on them, may now look quite different. This is a good moment to check that your Will still does what you intend.
- – Check your pension nominations. Most pension schemes allow you to record who you would like to benefit. These wishes sit alongside your Will, and they are easily overlooked or out of date.
- – Consider how liquidity will work. If a large part of your wealth is in your pension and your home, your executors may need to find money to pay IHT before the estate is fully accessible.
- – Think about how your pension fits with other plans. Whether to draw on a pension, spend other assets first or make lifetime gifts is a decision that now looks different, and is best taken with advice from both a solicitor and a financial adviser.
- – Keep your records in order. Make sure your family or executors know what pensions you hold and who to contact. Multiple pension pots take longer to trace and administer.
How Fiona Bruce Solicitors Can Help with Wills and Estate Planning
The changes affect estate planning and estate administration alike. We can review your existing Will in light of the new rules, advise on how your wishes are best recorded, and support executors who are dealing with an estate that includes pension funds. For pension-specific investment and drawdown decisions, we would usually recommend working alongside your financial adviser.
If you would like to discuss how the 2027 changes might affect you or your family, please contact our Private Client team.
The contents of this post do not constitute legal advice and are provided for general information purposes only ■
