Pension Inheritance Tax 2027: What Changes and How to Plan
From April 2027, unused defined contribution pension pots will be included in your estate for Inheritance Tax. That changes how almost everyone with a substantial pension should think about drawdown. Here is what is happening, who is affected, and what you can do before April 2027.
What is changing in April 2027?
At the moment, unused defined contribution pension pots sit outside your estate for Inheritance Tax purposes. If you die before drawing your pension, your beneficiaries can inherit the full pot with no IHT. This has made pensions one of the most tax-efficient ways to pass wealth to the next generation, and many people deliberately left their pensions untouched, drawing on other assets first.
From 6 April 2027, that changes. The government announced in the Autumn Budget 2024 that unused DC pension pots will be brought into the estate and subject to the standard 40% IHT rate above the available nil-rate bands. The change was confirmed and the legislation has been introduced, though some technical detail around the administration process is still being finalised.
This only affects defined contribution pensions
Defined benefit (final salary) pensions generally do not leave a residual pot, so they are not directly affected. Annuities already in payment are also outside the scope of the change. The change targets personal pensions, SIPPs, and most modern workplace DC pensions with a remaining unspent pot.
Who is most affected?
The change will affect anyone with a substantial DC pension pot whose total estate, including that pension, exceeds their available IHT nil-rate bands. In practice, this means the biggest impact falls on:
- Retirees with large pension pots who have been drawing from other assets and leaving the pension intact as an inheritance planning tool
- People with property-heavy estates who already use most of their NRB and RNRB, as adding a pension pot could push them significantly above the threshold
- High earners who have made large pension contributions specifically to reduce their estate, particularly those who maximised contributions in recent years after the annual allowance increased to £60,000
- Business owners with SIPPs used to hold commercial property or other assets
People with modest pensions whose estates stay below £500,000 (or £1,000,000 with spouse transfers and the RNRB) may not be affected at all, as the nil-rate bands will absorb any pension pot.
How the IHT calculation works
Under the new rules, your total estate for IHT purposes will include your non-pension assets (property, savings, investments, personal possessions minus debts) plus any unused DC pension pot. Your standard IHT allowances then apply to that combined figure.
| Allowance | Amount | Conditions |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | Everyone |
| Transferred NRB | +£325,000 | Unused NRB from deceased spouse |
| Residence NRB (RNRB) | £175,000 | Main home to direct descendants |
| Transferred RNRB | +£175,000 | Unused RNRB from deceased spouse |
A couple who have both died can potentially shelter up to £1,000,000 from IHT (£650,000 NRB + £350,000 RNRB) on the surviving spouse's death. But if the combined estate including pension pots exceeds £2,000,000, the RNRB begins to taper away at £1 for every £2 above that threshold.
Example calculation
Estate (property, savings): £600,000. Unused pension pot: £400,000. Total estate: £1,000,000. NRB available (own only, no spouse transfer): £325,000. RNRB (home to children, £350,000 property): £175,000. Total allowances: £500,000. Taxable estate: £500,000. IHT at 40%: £200,000.
Without the pension included: taxable estate £75,000, IHT £30,000. The pension adds £170,000 in extra IHT in this example.
The spouse exemption still applies
Transfers between spouses and civil partners remain fully exempt from IHT. If you leave your pension to your spouse, there is no IHT on that transfer. Your spouse also inherits your unused NRB and RNRB, potentially giving them a combined shelter of up to £1,000,000 on their death.
However, this only defers the problem. When your surviving spouse dies, their estate will include whatever remains of the pension, and IHT will be calculated on the full combined estate at that point. Leaving the pension to a spouse buys time but does not eliminate the liability.
Planning strategies before April 2027
There is time to act before the rules change. None of the following constitute financial advice. Speak to a qualified financial adviser before making significant changes to your pension or estate planning.
Draw down faster and spend or gift it
If you can afford to live well without touching your pension, consider drawing income from it now and either spending it (reducing the pot) or gifting it to family members. Gifts made from surplus income are immediately exempt from IHT under the "normal expenditure out of income" exemption, with no seven-year wait.
Use the pension to pay off debts or your mortgage
Debts reduce your estate value. Using a pension withdrawal to clear a mortgage reduces the estate by the same amount. The pension withdrawal is subject to income tax, but at least the money is no longer also subject to IHT.
Gifting under the seven-year rule
Cash gifts made more than seven years before death are fully outside the estate. The annual gift exemption (£3,000 per year) and small gifts exemption (£250 per person) are immediately exempt with no seven-year requirement. Starting gifts now gives the maximum runway before death.
Review pension nomination forms
Under the new rules, who you nominate to receive your pension on death matters more than before, because the tax treatment differs depending on whether the beneficiary is a spouse, child, or other person. Review your expression of wishes with your pension provider and ensure nominations are current.
Consider charitable giving
Leaving 10% or more of your net estate to charity reduces the IHT rate from 40% to 36% on the remainder. If you have charitable intentions, this can be a meaningful saving on larger estates.
Who pays the IHT on the pension?
Under the proposed rules, the pension scheme administrator will calculate and pay any IHT attributable to the pension pot directly to HMRC before distributing death benefits to beneficiaries. This means the beneficiary receives the pension minus the IHT due, rather than the estate having to fund the tax from other assets.
This is different from how IHT on the rest of the estate works, where the estate pays the tax before beneficiaries receive their inheritance. The split creates some complexity around sequencing, and the government is working through the administrative detail with the pensions industry.
Frequently asked questions
Will my pension be subject to Inheritance Tax from 2027?
From 6 April 2027, unused defined contribution pension pots will be included in your estate for Inheritance Tax purposes. The standard 40% rate applies to any amount above your available nil-rate bands. Defined benefit pensions and annuities already in payment are not directly affected.
How much extra IHT could my pension add?
It depends on your total estate. If your estate (including the pension) exceeds your nil-rate bands, 40% tax applies to the excess. For example, an estate of £600,000 plus a £400,000 pension, with only personal nil-rate bands available, could face £200,000 in IHT, compared to £30,000 without the pension included.
Can I avoid pension IHT by leaving it to my spouse?
Transfers to a spouse or civil partner are exempt from IHT, so leaving your pension to your spouse defers the tax. However, when your surviving spouse dies, the pension pot (and full estate) will be subject to IHT at that point. The spouse exemption buys time but does not eliminate the liability.
What can I do before April 2027 to reduce my pension IHT bill?
Options include drawing down your pension faster and gifting the income under the normal expenditure exemption, using pension withdrawals to pay off debts, making cash gifts under the seven-year rule, reviewing pension nomination forms, and considering charitable bequests. A qualified financial adviser can model the right approach for your estate.
Sources & methodology
Built and maintained by Tim, a personal finance enthusiast (not a financial adviser). Last reviewed April 2026. Rates and thresholds come from official UK government publications.
- HMRC: Income Tax rates and allowances · Official rates, bands and thresholds
- GOV.UK: National Insurance rates · Employee and employer NI rates
- Scottish Government: Income Tax · Scottish income tax rates and bands
- The Pensions Regulator: Auto-enrolment · Qualifying earnings and contribution thresholds
- GOV.UK: Tax on your private pension · Tax relief rules and annual allowances
- HMRC: Pension schemes · Salary sacrifice and pension scheme types
Figures are estimates only. This is not financial or tax advice. For help with your specific situation, speak to HMRC or a qualified adviser.
Calculate your pension IHT exposure
Use our Pension IHT Calculator to see how much extra Inheritance Tax your estate could face from April 2027, and model the impact of different scenarios including the spouse exemption.
Pension IHT Calculator