Will Pensions Be Subject to Inheritance Tax from April 2027?
For many years, pensions have been one of the most effective Inheritance Tax (IHT) planning tools in the UK.
However, following announcements in the Autumn Budget 2025, the position is changing.
From 6 April 2027, unused pension funds and certain death benefits will be brought within the scope of Inheritance Tax.
If you have built up significant pension savings, this could materially affect your estate planning.
In this guide, we explain:
- What the current rules are
- What changes from April 2027
- Who will be affected
- How the reporting will work
- What planning steps may now be needed
Are Pensions Currently Subject to Inheritance Tax?
Under the current rules (before 6 April 2027):
- Most unused pension funds fall outside the estate for IHT purposes.
- Pension death benefits are usually paid at the discretion of the scheme administrator.
- Because they are not normally part of the estate, they are generally outside IHT.
This has made pensions an extremely efficient estate planning vehicle.
Many individuals have deliberately preserved pension wealth while spending or gifting other assets.
What Is Changing from 6 April 2027?
According to HMRC’s published update following the Autumn Budget 2025:
From 6 April 2027, unused pension funds and death benefits payable from a pension will be brought into a deceased person’s estate for Inheritance Tax purposes .
This represents a significant policy shift.
Instead of pensions automatically sitting outside the estate, they will now be considered when calculating IHT.
Who Will Be Responsible for Paying the Inheritance Tax?
The updated guidance confirms:
- Personal representatives will be responsible for reporting and paying any Inheritance Tax due on unused pension funds and death benefits .
This centralises responsibility within the estate administration process.
Previously, pension scheme administrators often handled death benefit payments separately from the estate.
What Was Announced in the Autumn Budget 2025?
The Budget confirmed:
- Legislation will be introduced in the Finance Bill 2025–26.
- The changes will take effect from 6 April 2027 .
In addition, where personal representatives reasonably expect IHT to be due, they may direct pension scheme administrators to withhold 50% of taxable benefits for up to 15 months from the date of death .
This allows funds to be retained to settle the IHT liability before distribution to beneficiaries.
Will All Pension Benefits Be Affected?
The changes apply broadly to:
-
Unused pension funds
-
Death benefits payable from pension schemes
However, certain exclusions were mentioned, including:
- Exempt beneficiaries
- Benefits under £1,000
- Continuing annuities
Detailed legislation is expected to clarify the precise scope.
Why Is This Significant?
Historically, pensions were often the last asset individuals intended to draw upon.
For example:
- Property and investment portfolios might be gifted or spent first.
- Pensions were preserved because they were outside the IHT net.
From April 2027, this strategy may no longer produce the same estate planning benefit.
For individuals with:
- Large defined contribution pensions
- Unused drawdown funds
- Significant retirement savings
The potential IHT exposure could increase materially.
Example: Estate Planning Impact
Assume:
- Estate excluding pension: £1 million
- Pension fund: £600,000
- Nil rate band: £325,000
- Residence nil rate band: £175,000
Under current rules:
- Pension may fall outside the estate.
- IHT calculated only on £1 million.
From April 2027:
- Pension included.
- Estate becomes £1.6 million.
The additional £600,000 may be subject to 40% IHT (subject to available allowances).
That could represent an additional £240,000 tax exposure.
This is why planning conversations are already beginning.
What About Income Tax on Pension Death Benefits?
It is important to distinguish between:
- Inheritance Tax
- Income Tax on pension withdrawals by beneficiaries
Currently:
- If death occurs before age 75, pension withdrawals can often be tax-free (subject to rules).
- If death occurs after age 75, beneficiaries pay Income Tax at their marginal rate on withdrawals.
From 2027:
The IHT exposure may apply in addition to any Income Tax consequences.
This layering effect could significantly reduce the net amount beneficiaries receive.
Will This Affect Defined Benefit Schemes?
The update refers primarily to unused pension funds and death benefits.
Defined benefit schemes may operate differently depending on:
- Lump sum death benefits
- Survivor pensions
- Scheme structure
Further detailed guidance is expected.
What Should Business Owners Consider Now?
Although the change does not take effect until 6 April 2027, planning may need to begin well before then.
Possible considerations include:
- Reviewing overall estate value
- Reassessing gifting strategies
- Considering use of trusts
- Reviewing pension withdrawal strategy
- Rebalancing asset mix
- Life insurance planning
For some individuals, drawing pension funds earlier may become part of a broader estate plan.
However, this must be weighed carefully against Income Tax consequences.
Is This Law Final?
The change is scheduled to be legislated in the Finance Bill 2025–26, with effect from April 2027 .
As with all tax legislation, further detail will be provided in the final enacted version and accompanying guidance.
Given the scale of the change, further technical clarification is likely before implementation.
Final Answer: Will Pensions Be Subject to Inheritance Tax?
From 6 April 2027, unused pension funds and certain death benefits will be included in a deceased person’s estate for Inheritance Tax purposes .
This represents a major shift in UK estate planning.
If you have significant pension savings, it would be prudent to review your estate planning strategy well before 2027.
