Pensions and Inheritance Tax: What Changes in April 2027?

For years the standard approach was to spend other savings first and leave your pension untouched, because pensions sat outside your estate. From April 2027 that logic changes. If a meaningful part of your wealth is in a pension you hoped to pass on, this is the change to understand. This guide is part of our complete guide to UK retirement rules.

01What exactly is changing?

At present, money left in a defined contribution pension when you die is normally outside your estate for Inheritance Tax. For deaths on or after 6th April 2027, most unused pension funds and pension death benefits will be included.

The change was announced in the Autumn 2024 Budget and became law when the Finance Act 2026 received Royal Assent on 18th March 2026. If you die before 6th April 2027, the current rules apply, even if the money is paid out later.

02What is included and what is exempt?

Why do annuity guarantees count? If you die during an annuity’s guarantee period, the remaining payments go to someone else. Value protection does something similar, paying out a lump sum based on what you paid for the annuity minus the income you have already received. Both effectively pass your own pension money on after your death, which is exactly what the new rules are designed to catch. So from 6th April 2027 they count towards your estate, unless they go to your spouse, civil partner or a charity. A joint-life annuity is different. The income your partner receives after you die is treated as their own right, not part of your estate, so it is not included.

The spouse exemption is the big one. If you leave your pension to your husband, wife or civil partner, no Inheritance Tax is due on it. The issue usually arises on the second death, when the combined estate passes to children or others. Unmarried partners do not get this exemption.

03Who is most affected?

• People with sizeable pensions they do not expect to spend
• Single, divorced or widowed people, who have no spouse exemption to rely on
• Unmarried couples
• Homeowners whose property already uses up most of their allowances
• Estates close to £2 million, for the reason explained below

If your pension is modest and you expect to spend most of it in retirement, the change is unlikely to matter much.

04How do the allowances work?

Inheritance Tax is charged at 40% on the value of your estate above your allowances. Both are frozen until April 2031.

• The nil-rate band is £325,000 per person.
• The residence nil-rate band is up to £175,000 per person, available when a home passes to children or grandchildren.

Married couples and civil partners can pass unused allowances to the survivor, so together they can leave up to £1 million free of Inheritance Tax.

05What is the £2 million trap?

The residence nil-rate band is withdrawn for larger estates. For every £2 your estate is over £2 million, you lose £1 of it.

Pensions did not count towards that £2 million test. From April 2027 they will. So an estate that was comfortably under the line can be pushed over it, and lose some or all of an allowance worth up to £350,000 for a couple.

06Can pensions be taxed twice?

Yes, in some cases. Inheritance Tax and income tax are separate.

• If you die before 75, your beneficiaries normally pay no income tax on what they receive from your pension.
• If you die at 75 or older, they pay income tax at their own rate on what they withdraw.

From April 2027, a pension left by someone aged 75 or over can face Inheritance Tax first, and then income tax when the beneficiary takes the money. Income tax is not charged on the part used to pay the Inheritance Tax, but the combined bite is still heavy.

07Who pays the tax, and how?

Your personal representatives, meaning your executors or administrators, are responsible for reporting and paying Inheritance Tax on your pensions, as they are for the rest of your estate. Pension schemes must give them a valuation within 28 days of being asked.

Two mechanisms help. Personal representatives can ask for a scheme to hold back up to 50% of the benefits for up to 15 months while the tax is worked out. And where the tax is £1,000 or more, they or the beneficiary can instruct the scheme to pay HMRC directly, which the scheme must do within 35 days.

In practice this means your executors need to know about every pension you have. A list of your pensions kept with your will is one of the simplest and most useful things you can prepare. If you have lost track of any, see how to find lost pensions.

08What are people reviewing before April 2027?

There is no single right response, and acting in a hurry can create a tax bill that did not need to exist. These are the areas people are looking at.

• The order they draw on their savings. Spending pension money before ISAs is no longer obviously wrong.
• Whether to use more of the pension in their own lifetime, including tax-free cash.
• Whether to secure a guaranteed income. See drawdown vs annuity.
• Gifts in their lifetime, including regular gifts out of surplus income.
• Whether their expression of wish forms are up to date. These still decide who receives the pension.
• Whether to marry or form a civil partnership, for couples who are not.

Each of these has knock-on effects. Taking more out of a pension means more income tax now. Gifts can be caught if you die within seven years. This is an area where decisions interact, so it is worth taking regulated advice before changing course.

09Frequently asked questions

Will my whole pension be taxed at 40%?

No. Inheritance Tax is only charged on the part of your total estate above your allowances, and nothing is due on money left to a spouse or civil partner.

Should I take money out of my pension before April 2027?

Not automatically. Withdrawals are taxed as income, and the money is still in your estate once it is in your bank account. It can make things worse.

Does this affect final salary pensions?

A pension paid to a surviving spouse or dependant from a defined benefit scheme is not included. Some lump sum death benefits are.

Does my annuity count towards my estate?

The regular income stops when you die, so there is usually nothing left to count. But if your annuity has a guarantee period or value protection, any payments made after your death count towards your estate from 6th April 2027, unless they go to your spouse, civil partner or a charity. Income that carries on to your partner under a joint-life annuity does not count.

Is my death-in-service benefit affected?

No. Death-in-service benefits are excluded.

Do I still need an expression of wish form?

Yes. It still tells the scheme who you would like to receive your pension, and it should be kept up to date.

What if I die before 6th April 2027?

The current rules apply, and unused defined contribution pensions are normally outside your estate.

10Sources and further reading

• GOV.UK: Inheritance Tax on unused pension funds and death benefits
• GOV.UK: Inheritance Tax thresholds and the residence nil-rate band
• Royal London: Inheritance Tax on pension death benefits from April 2027
• MoneyHelper: A guide to Inheritance Tax

Important: This guide is financial education, not regulated financial advice or a personal recommendation. It reflects the rules for the 2026/27 UK tax year as at October 2026. Tax rules change, and how they apply depends on your circumstances. Inheritance Tax planning depends entirely on your own circumstances, and HMRC guidance on the new rules is still being published. If you are unsure, speak to an FCA-regulated financial adviser. You can also get free, impartial guidance from MoneyHelper, and from Pension Wise if you are 50 or over.