Guide
Pensions and inheritance tax from April 2027: what changes
Updated
For twenty years the standard advice was to spend everything else and leave the pension till last, because it passed free of inheritance tax. From 6 April 2027 that logic inverts.
What was announced, and when it bites
At Autumn Budget 2024 (30 October 2024) the government announced that unused pension funds and death benefits will be included in estates for inheritance tax for deaths on or after 6 April 2027. After consultation, updated policy and draft legislation followed in July 2025, shifting the reporting and payment liability to personal representatives rather than pension schemes (gov.uk: IHT on pensions, liability, reporting and payment).
What is in scope
- In scope: unused defined-contribution pots (drawdown and uncrystallised funds) and most lump-sum death benefits from registered pension schemes.
- Out of scope: death-in-service benefits payable from registered pension schemes (confirmed in the July 2025 update), and pensions passing to a spouse or civil partner or to charity, the existing exemptions apply as normal.
- Beneficiaries other than a spouse, typically children, are where the new charge lands.
The double tax after 75
The existing income tax rule continues: if you die at or after age 75, beneficiaries pay income tax at their own marginal rate on pension withdrawals. From April 2027 that stacks on top of IHT. On a pension slice taxed at 40% IHT, a beneficiary then pays income tax on the remaining 60%:
| Beneficiary's income tax band | Income tax on the post-IHT 60% | Combined effective rate |
|---|---|---|
| Basic rate (20%) | 12% | 52% |
| Higher rate (40%) | 24% | 64% |
| Additional rate (45%) | 27% | 67% |
Deaths before 75 remain income-tax-free for the beneficiary (within the lump sum and death benefit allowance), so the pension suffers IHT only.
What people are doing about it
- Reordering drawdown, spending pension first and preserving ISAs and other assets is now often the tax-efficient order, reversing the old advice.
- Spouse first, leaving the pension to a spouse (exempt) and using both sets of allowances on the second death.
- Gifting withdrawals, regular gifts out of surplus pension income can be immediately exempt; larger gifts start the 7-year clock.
- Reviewing death-benefit nominations, many were written purely to exploit the pre-2027 rules and no longer do what their owners think.
This is a description of announced rules, not planning advice, and final legislation can differ in detail from the draft. Check the gov.uk pages linked above, and take regulated advice before restructuring.