Inheritance Tax and Pensions: An Overview of the 2027 Changes

Reviewed by Ed WilkinsonLast updated: April 24, 2026 1:42 pm

Image credit: SHVETS production @Pexels

Please note that the legislation hasn’t been finalised yet, so changes are still possible, and further details are still expected.

In 1986, the UK introduced the Finance Act 1986, which replaced the Capital Transfer Tax with Inheritance Tax (IHT) to tax wealth passed down through estates upon death.

Historically, pension contributions have been excluded from estate calculations and have not been subject to inheritance tax. However, this position is expected to change from April 2027.

How Pensions and Inheritance Tax Work Today

A pension pot serves as a long-term savings method, built through contributions and investment growth. Under current rules, these funds usually sit outside the taxable estate. That distinction allows beneficiaries to receive the remaining pension value without inheritance tax applying at the point of transfer.

Estate value includes property, savings, investments, and personal possessions. Once the nil-rate threshold is exceeded, a 40% tax rate may apply to the portion above the allowance.

This separation has shaped many financial plans. Some individuals have prioritised pensions over other investments due to their favourable treatment.

Could Pensions Become Subject to Inheritance Tax?

If the proposed changes go ahead, pensions may be brought more in line with other estate assets. From April 2027, unused pension funds are expected to be included in estate valuations for inheritance tax purposes. This would remove their long-standing exemption.

While not widespread, pension schemes are sometimes used as an efficient means of passing down wealth among high-income individuals, so the intentions behind these schemes reflect a desire to prevent pension pots from being used this way.

For those with substantial unused funds, estate exposure may increase. Planning strategies that once relied on pension wrappers may require adjustment.

Pension Death Benefits and Tax Explained

Pension death benefits are an important part of the overall tax picture. When someone dies, their pension can usually be passed on either as a lump sum or as ongoing income to beneficiaries.

How these benefits are taxed depends largely on the age at death and the type of pension. If death occurs before a certain age, beneficiaries may receive the funds under more favourable tax conditions. If it happens later, different rules may apply, particularly when money is taken as income.

Employer-provided death-in-service benefits, when paid through a registered pension scheme, are usually not subject to inheritance tax. These payments are typically designed to support dependants rather than form part of the estate.

Transfers to spouses, civil partners, and registered charities also continue to benefit from favourable tax treatment, making them an important part of estate planning.

It’s also worth noting that even if pension funds are outside inheritance tax, they may still be subject to income tax when withdrawn.

Who Will The Changes Primarily Affect?

The vast majority of individuals are unlikely to see a change upon receiving an inheritance, as previous allowances and exceptions will remain in place.

Current Exemptions:

• Death in Service Arrangements
• Transfers to Spouses, Civil Partners or Charities.

Common Current Allowances:

• Nil-Rate Band Allowance – Currently set at £325,000
• Residence Nil- Rate Band – Currently £175,000 (Only applicable when a residence is left to a direct descendant)

Those with estates valued over £325,000 are likely to see the biggest change. If an estate does exceed £325,000, so long as the recipient is the direct child, stepchild by marriage or grandchild of the deceased, the tax-free threshold will increase to £500,000 once the Nil-Rate Band and Residence Band are combined.

According to HM Revenue & Customs (HMRC), only 4.62%¹ of deaths resulted in an inheritance tax charge in 2022-23. Although this number has likely increased since 2023, it serves as a good baseline for determining who will be affected.

For a more detailed look at exemptions and allowances, please read our article “Inheritance Tax in the UK: A Simple Guide to Rules, Rates and Allowances.”

Common Misunderstandings on Tax and Pensions

Several common assumptions continue to cause confusion.

Some believe pensions will remain fully exempt, regardless of legislative changes. That expectation no longer aligns with current proposals.

Others assume all pension death benefits are subject to inheritance tax. In reality, the treatment varies depending on the scheme and how benefits are passed on.

There is also a tendency to overlook how allowances interact. Combining reliefs can significantly change the overall tax position, yet many plans fail to account for this.

Things to Consider When Reviewing Your Pension

With legislative changes on the horizon, it’s important to review how your pension is managed and the level of contributions you make.

• Monthly costs: Consider your regular outgoings, including bills, lifestyle expenses, gifts and private healthcare.
• Inflation: Think about how costs may rise both before and during retirement. Economic indicators, such as the Bank of England’s base rate², can provide some guidance on inflation trends.
• Emergency funds: Maintaining an emergency fund, even in retirement, can help manage unexpected expenses without disrupting your income.
• Longevity of your pension pot: For example, a pension pot of £500,000 with annual withdrawals of £30,000 would last around 16-17 years. This does not account for inflation or rising costs, so both retirement timing and expected lifespan should be considered carefully.
• Surplus allocation: Once you’ve established a suitable retirement income, consider how to use any surplus. With upcoming inheritance tax changes, these decisions have become more complex, but careful planning can help ensure your long-term goals are met.

FAQs: Inheritance Tax and Pensions

Will all pensions be subject to inheritance tax from 2027?

No, the nil-rate band allowance still applies, so any estate evaluations (including any unused pension pots) below £325,000 will not be charged inheritance tax. Other exemptions and allowances can also increase your allowance beyond £325,000, such as the residence nil-rate band, charitable giving, and spousal/civil partnership exclusions, which further decrease the amount of unused pensions subject to an inheritance tax bill.

Please note that this is subject to change, so staying up to date is crucial.

Do exemptions still apply?

Yes. Transfers to spouses, civil partners, and charities continue to receive favourable tax treatment. Death-in-service benefits also typically remain outside the estate for inheritance tax purposes.

Should pension contributions be reduced?

Pensions still offer valuable tax advantages while contributing. However, inheritance tax may affect any remaining unused funds. The right approach will depend on individual circumstances and should be considered carefully. Speaking with a financial adviser can help clarify the best course of action.

How can individuals prepare?

Regularly reviewing your estate, pension contributions, and wider investments can help ensure your plans remain aligned with changing rules. Adjustments over time can improve tax efficiency and support long-term financial goals.

Evolving Pension Tax Rules

The landscape surrounding pensions and inheritance tax is shifting. What once offered clear advantages may now require reconsideration.

Careful planning, supported by up-to-date advice, remains the most reliable approach. As rules evolve, flexibility and awareness will prove more valuable than rigid strategies.

Consider Seeking Financial Advice

The proposed changes for 2027 can make planning your pension options much more complex than in previous years. Simply having a pension scheme administrator may not suffice in a world where evolving tax rates need to be considered.

Seeking the aid of a financial adviser can help make your decision-making much clearer.

FinancialAdvisers.co.uk can help you find a regulated adviser by introducing you to an FCA-authorised firm in your area. Remember to always check firms and individuals on the FCA Financial Services Register, and understand the service and fees before proceeding.

This content is intended for general information and should not be treated as personal financial advice.

This article contains external links for further information on topics. Whilst all attempts are made to verify the trustworthiness of these external sources, we accept no responsibilty for the upkeep or security of these external websites. Some of these links in particular are annotated below:

• ¹ https://www.gov.uk/government/statistics/inheritance-tax-liabilities-statistics/inheritance-tax-liabilities-statistics-commentary
• ² https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate