Pensions and Inheritance Tax: Big Changes Coming in 2027

May 12, 2026

From 6 April 2027, unused pension pots will be pulled into your estate for Inheritance Tax purposes for the first time in decades. With 89% of UK adults unaware of the change, now is the time to understand what it means for your family and take action before the deadline.

For decades, UK savers have used pension pots not just to fund retirement, but as one of the most tax-efficient ways to pass wealth to the next generation. Under the current rules, whatever remains in your defined contribution pension when you die sits outside your estate for Inheritance Tax purposes entirely — shielded from the 40% charge that applies to other assets.

That changes on 6 April 2027. The government has confirmed that unused pension wealth will be brought within the scope of IHT, representing the most significant overhaul of pension death benefit taxation in a generation. For many families, this will come as a surprise: research by Standard Life in February 2026 found that nine in ten UK adults (89%) have little or no awareness of the change.

This article explains what is happening, who is likely to be affected, and — crucially — what you can do about it before the deadline arrives.

What Is Actually Changing?

Under the existing rules, defined contribution (DC) pensions — such as personal pensions, SIPPs, and most modern workplace pensions — do not form part of your estate on death. This means they are not subject to IHT regardless of how large the pot has grown. It has made pensions an especially attractive vehicle for accumulating and passing on wealth, particularly for those who can afford to live off other assets in retirement.

From 6 April 2027, the value of your unspent pension funds will be added to your other assets — property, savings, investments — when calculating your total estate for IHT. If the combined total exceeds your available nil-rate bands, the excess will be taxed at 40%.

Adding a substantial retirement pot — say, £200,000 or £400,000 — to an estate that already includes a family home and savings could easily push many families over these thresholds for the first time. The government estimates around 10,500 additional estates per year will become liable as a result of this change.

Who Will Be Affected?

The change is most likely to affect those who have accumulated significant pension wealth but have not drawn heavily on it during retirement. This includes people who have lived off other assets (property rental income, ISAs, savings) precisely because they wanted to pass their pension on intact — a strategy that will become far less tax-efficient under the new regime.

It is also important to note what has not changed. Transfers between married couples and civil partners remain exempt from IHT — the spousal exemption is preserved in full. Gifts to registered charities also remain outside the scope of IHT. However, unmarried partners do not benefit from the spousal exemption, which makes this change especially significant for cohabiting couples who have not formalised their relationship legally.

Defined benefit (final salary) pension schemes are treated differently: they pay an income to survivors rather than a lump sum, so the mechanics of the IHT charge differ significantly. If you are in a defined benefit scheme, you should take specific advice about how the new rules interact with your particular arrangement.

The Double Taxation Problem for Over-75s

For those who die aged 75 or over, the picture is particularly stark. Under existing income tax rules, pension withdrawals made by beneficiaries from an inherited pension are subject to income tax at the beneficiary's marginal rate. Under the new rules, that same pot will also have been subject to IHT at 40% first.

In the worst case — where the pension is inherited by an additional-rate taxpayer — the combined effect of 40% IHT and 45% income tax could see an effective overall tax rate of up to 67% on the inherited pension funds. This is a dramatic shift from the current position, where pensions passing to beneficiaries after the age of 75 are taxed only at income tax rates.

If you die before the age of 75, the position is somewhat better: whilst IHT will now apply, any subsequent withdrawals by beneficiaries remain income tax-free. This creates an important planning distinction depending on age at death.

Rethinking Your Long-Term Withdrawal Strategy

For many people, the conventional approach has been to spend other assets first — drawing on savings, ISAs, and property — and to leave their pension untouched for as long as possible, benefiting from continued tax-free growth and eventual tax-free inheritance. That logic is now considerably weakened.

Once pensions are inside the estate for IHT, there is a stronger case for reviewing the order in which you draw down your various assets. Drawing from your pension earlier in retirement, rather than preserving it as an inheritance vehicle, may make more sense — particularly if you can use the withdrawn funds to make lifetime gifts, fund ISA contributions, or reduce the overall size of your taxable estate.

This does not mean that pensions become a poor way to save — far from it. The tax relief on contributions and tax-free growth within the pension wrapper remain powerful advantages. What changes is the calculus around how and when to draw on your pension in retirement.

Five Steps to Take Before April 2027

Frequently Asked Questions

Will the spousal exemption still apply to pension pots after April 2027?

Yes. Assets passing between married couples and civil partners — including pension funds — remain exempt from IHT under the spousal exemption. The new rules primarily affect transfers to children, grandchildren, and other beneficiaries outside that exemption.

Does this affect defined benefit (final salary) pensions?

Defined benefit pensions work differently from defined contribution pensions. They do not leave a pot of money; they pay an income stream to the member and, in many cases, a reduced income to surviving dependants. The IHT treatment of defined benefit death benefits is more complex and will depend on the specific scheme rules. Specialist advice is recommended if you are in a defined benefit scheme.

What if the rules change before April 2027?

Tax legislation can change, and the government has indicated it may consult further on implementation details before the rules take effect. However, the policy direction is clear, and planning now gives you the greatest flexibility regardless of any minor adjustments to the final legislation.

Should I stop contributing to my pension because of these changes?

No. The tax relief on contributions — worth 20%, 40%, or 45% depending on your tax band — remains one of the most generous financial incentives available. Pensions continue to be an outstanding vehicle for long-term saving. What changes is how you might choose to draw on your pension in retirement, not whether to contribute in the first place.

Could I use life insurance to cover the IHT bill on my pension?

A whole-of-life insurance policy written in trust can be a practical way to provide a lump sum to beneficiaries to cover an IHT liability — without that payout itself forming part of the taxable estate. The cost and availability of cover will depend on your age and health. This is one option worth exploring alongside other planning strategies.