A major change to pensions and inheritance tax is now just six months away.
From 6 April 2027, most unused pension funds and pension death benefits will be included in a deceased’s estate for inheritance tax (IHT) purposes.
It marks a major shift from current legislation, which does not consider most pension funds when calculating the tax.
Sam Richardson, Which? money editor, told the Money blog: “It’s well worth taking the time to take stock of your finances and seeing whether it’s possible your estate could be impacted.
“If your pension pot is likely to tip you over the inheritance tax threshold, there are plenty of ways you can still minimise any future tax bill.”
In this guide we’ll explain the changes and look at some of the ways people might look to minimise their impact.
Which pensions will be impacted?
Most employees outside the public sector have a defined contribution pension, which will now be considered when calculating a possible IHT bill.
This includes funds that are in income drawdown, but not payments from annuities.
For those, often within the public sector, with defined benefit pensions, the following applies: lump sum death benefits will fall within inheritance tax, but regular income provided to your spouse or civil partner after your death is exempt.
HMRC has also stated that most “death in service” benefits will remain exempt, but may need to be reported to them by pension scheme administrators.
Joint life annuities and dependents’ scheme pensions are also exempt from the new legislation.
Most people don’t pay inheritance tax
It’s worth pointing out that inheritance tax only applies to estates worth more than certain thresholds.
Everyone has a £325,000 tax-free allowance, while those passing their main home to direct descendants can usually benefit from an additional £175,000 residence nil-rate band.
Married couples and civil partners can pass unused allowances to each other, potentially allowing up to £1m to be passed on tax-free.
Read more:
What is inheritance tax and how does it work?
Office for Budget Responsibility data suggests the proportion of deaths triggering an IHT bill will rise from 5% in 2022-23 to 10% by 2030. Frozen tax thresholds are a big driver of this, but the reforms we are outlining in this piece also play a part.
About 10,500 estates that wouldn’t otherwise have owed tax will become liable in 2027-28, according to government estimates.
‘Double tax’ fear
Investment platform AJ Bell has argued some inherited pensions might face both inheritance tax and income tax.
If someone dies before the age of 75, beneficiaries can usually access inherited defined contribution pension funds tax-free – this won’t change.
But under the current rules, if they die aged 75 or over, beneficiaries normally pay income tax at their marginal rate when they make withdrawals.
As most unused pension funds will be considered within the value of the estate for inheritance tax under the new rules, some fear this over-75s cohort could have some of their estate subject to both inheritance and income tax.
This could result in an effective tax rate of up to 64% for higher-rate taxpayers, AJ Bell says.
Pic: iStock
In August, the Money blog put all this to the Treasury, which firmly denied the claims.
“Where inheritance tax is paid on pension benefits, beneficiaries are not taxed twice on the same funds,” a spokesman said.
“More than 90% of estates each year will continue to pay no inheritance tax after these changes.”
Sky News understands ministers plan to introduce a mechanism to ensure beneficiaries are not taxed twice on the same pension funds where inheritance tax has already been paid.
Do you need to rethink your pension plan?
For years, one common inheritance planning strategy was to spend other assets first and leave pension wealth untouched because it sat outside the estate.
That rationale weakens from April 2027.
It’s always recommended to get independent professional advice when planning for your retirement – and certainly not rely on anything you see in the media.
But experts at Which? have outlined some things retirees may want to consider in making decisions:
“The first thing you might consider doing is using your pension savings for their original purpose – to fund your later years once you leave the workplace.
“In the past, people tended to save pensions until last and spend taxable cash or ISAs first. Now, drawing on your pensions during your lifetime to pay for both day-to-day expenses and some treats can reduce the taxable size of your estate.
“But you’ll need to be careful to avoid running out of money too early.
“Behaviour has started to change. In a June 2026 survey of Which? members, 20% of those who said the new rules would affect their estate planning are already spending more of their retirement savings, while 58% plan to do so.”
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Of course, if you decide to take more money from your pension, it’s worth considering whether you’re simply replacing one tax, inheritance tax, with another, income tax.
Which? also suggests people could consider accelerating gifting to ensure the funds remain outside of inheritance tax.
Gifts are generally outside your estate for inheritance tax purposes if you survive for seven years after making them, although some exemptions apply.
Which? money editor Sam Richardson said: “It is of course important to ensure you balance any extra spending or gifting with maintaining your income, so it may be worth getting professional advice if you’re in any doubt.”
Potential admin headache for families
Personal representatives – those appointed to settle the affairs of someone who has died – will be responsible for taking “reasonable steps” to identify the deceased person’s pension savings, work out their value and pay tax on them.
As with other taxable assets, they’ll need to scan through the person’s records and bank accounts, but HMRC says representatives may also need to contact pension companies and insurance schemes themselves to notify them of the death and request information.
Irwin Mitchell Solicitors points out that families often face “fragmented records, historic workplace schemes and multiple providers”.
