Are Pensions Subject to Inheritance Tax from 2027?

What’s changing, who’s affected, and how to think about planning

From 6 April 2027, most unused pension funds and pension death benefits will be included in the taxable estate for Inheritance Tax (IHT). For years, many households sensibly preserved pensions and spent down ISAs or unwrapped assets first, in part because pensions were generally outside the IHT net. That default flips: the treatment at death becomes “generally inside,” with spouse/civil partner and charity exemptions still applying. Crucially, it is executors—not pension schemes—who will report and settle any IHT attributable to pensions, alongside the usual probate tasks and timelines.

This reform arrives while the nil-rate band (£325,000) and residence nil-rate band (£175,000) remain frozen through 2029–30, quietly pulling more estates into charge as asset values rise. In other words, the landscape moves in two directions at once: thresholds are static and pensions are in scope. The result is a broader set of families needing to consider IHT, even if they never viewed themselves as “IHT cases”.

Who is likely to be affected?

The impact hinges on estate composition rather than a single headline number. Estates heavy in property and pensions—especially where there is no surviving spouse/civil partner or where charitable giving is modest—will feel the change first. Estates that already relied on NRB/RNRB might still avoid IHT, but the freeze increases the odds of crossing a threshold, particularly if a significant pension remains unused at death.

Beneficiary design matters as much as totals. A full spousal transfer typically defers IHT to the second death, while legacies to charity can reshape the effective rate. Where adult children are primary beneficiaries, the inclusion of pensions may increase the bill unless planning anticipates it.

Why the administration matters

Under the new rules, personal representatives must obtain “as-at-death” pension valuations from each relevant scheme, decide who ultimately bears the IHT attributable to pensions, and meet the standard six-month payment deadline. That timetable rarely aligns with the practical realities of property sales, private business valuations, or slow data from multiple pension providers. Planning that includes liquidity—cash or life insurance written in trust—helps executors avoid rushed decisions or distressed sales.

Rethinking the old “sequence of spending”

Before 2027, it was common to spend ISAs/unwrapped assets first, preserving pensions for later flexibility or heirs. When unused pension funds enter the IHT calculation, dying with a large untouched pot can increase the liability. That doesn’t imply panic withdrawals; it points to a rebalanced plan. Typically, that means:

• Taking measured drawdown so retirement income is funded without leaving an unnecessarily large pot at death.
• Considering partial annuitisation for essential spending needs, trading some capital for guaranteed income.
• Coordinating gifts out of surplus income where appropriate (with proper records), so value moves outside the estate during life.

The right mix depends on income needs, risk tolerance, longevity assumptions, and beneficiary aims. The key is to view income tax and IHT together, across the whole retirement horizon—not optimise just one year or one tax.

What about cross-border or complex structures?

Highly engineered or offshore arrangements marketed as “IHT solutions” should be approached with caution. Where there is clear commercial substance and robust legal and tax advice, some structures may have a role; but purely tax-driven schemes risk anti-avoidance scrutiny. Most families do best by combining straightforward levers—sequencing, gifts from income, insurance in trust, charitable design, and, where appropriate, Business Relief—into a plan they can explain, document, and execute.

The bottom line

From April 2027, pensions join the IHT conversation. The best response is calm, coordinated planning: rethink the order of withdrawals, tidy nominations and wills, ensure liquidity for executors, and use remaining reliefs deliberately. That’s how households keep retirement on track while shaping the legacy they intend.