How inheritance tax on pensions will work under the new rules
Pensions have long been one of the most efficient tools in estate planning. Build up your pot, leave it largely untouched, and it would typically pass to your beneficiaries outside of your estate, with no inheritance tax (IHT) to pay. From 6 April 2027, that changes significantly, as most unused pension funds and death benefits will be brought into the value of a person’s estate for inheritance tax purposes.
As accountants and tax advisors, we’re fielding a growing number of client questions about what this means in practice, and if you hold meaningful pension wealth, or act as an executor for someone who does, it’s worth understanding how the new rules will operate.
What's changing and why
The current position
Under current rules, most personal and workplace pensions sit outside your estate for inheritance tax purposes, making them an attractive vehicle for passing wealth down the generations, often more so than for their intended purpose of funding retirement.
Why the rules are changing
HMRC and the Treasury view this as a distortion. Pensions benefit from tax relief on contributions and tax-free growth, and the government’s position is that they shouldn’t also function as a shelter for wealth transfer. From 6 April 2027, most unused pension funds and death benefits will therefore be included in the value of a deceased person’s estate for inheritance tax purposes. HMRC’s technical note on Inheritance Tax on pensions confirms an individual will be treated as having beneficial ownership of “notional pension property” immediately before death, bringing the funds into charge.
Where things stand legally
This is now settled legislation, not just a proposal:
- Finance Act 2026 received Royal Assent on 18 March 2026, amending the Inheritance Tax Act 1984.
- The government’s own policy paper on unused pension funds and death benefits confirms the measure now sits in law.
- The rules apply to deaths on or after 6 April 2027; where a member dies before that date, current treatment continues even if benefits are paid out later.
The scale of the impact
Most estates will continue to have no inheritance tax liability at all. HMRC’s own projections, set out in its published impact assessment, show:
- Around 213,000 estates will have inheritable pension wealth in 2027 to 2028.
- Approximately 10,500 estates will become newly liable, roughly 1.5% of total UK deaths.
- A further 38,500 estates will see an increased liability.
- The average liability for affected estates is expected to rise by around £34,000.
If your estate is already close to the nil rate band and residence nil rate band thresholds, or your pension forms a substantial part of your net worth, this is worth planning around.
What remains outside the scope of IHT
The reforms don’t bring everything into charge. Several exemptions are retained:
- Transfers between spouses and civil partners remain fully exempt.
- Gifts to registered charities continue to fall outside inheritance tax.
- Death in service benefits, from discretionary and non-discretionary schemes, are excluded entirely.
- Dependants’ scheme pensions from defined benefit or collective money purchase schemes also stay out of scope.
What this means for spousal planning
If your planning is built around leaving your pension to your spouse, there’s no immediate change, as the liability will typically fall due on the second death instead.
Who is responsible for reporting and paying the tax
This is the area generating the most client queries, as it introduces new obligations for executors and administrators.
Personal representatives, not pension providers
Responsibility for reporting and paying any inheritance tax due on unused pension funds will sit with the personal representatives of the estate: typically the executors named in the will, or the administrators appointed where there’s no will. The original proposal placed this obligation on pension scheme administrators instead, but that was dropped after industry feedback flagged practical difficulties, since providers generally have no visibility of a member’s wider estate. This shift is confirmed in HMRC’s summary of responses to the technical consultation.
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The withholding and payment notice mechanism
To support personal representatives who may lack immediate access to liquid funds, HMRC is introducing a mechanism sometimes called the Pensions Direct Payment Scheme:
- A withholding notice lets a personal representative instruct a pension scheme administrator to hold back up to 50% of taxable benefits for up to 15 months, giving time for the estate’s tax position to be finalised.
- A payment notice can then instruct the administrator to pay the tax directly to HMRC before releasing the remainder to beneficiaries.
- Alternatively, beneficiaries can receive the funds in full and settle the liability themselves.
- Where pension beneficiaries differ from the wider estate’s beneficiaries, personal representatives can reclaim a proportionate share.
Clearance and deadlines
Once HMRC issues a clearance certificate, personal representatives are discharged from liability for any further pension funds discovered afterwards. The six-month payment deadline remains in place, though HMRC has acknowledged estates with limited liquid assets may need tailored solutions, and has committed to further guidance ahead of implementation.
The interaction with income tax
The age 75 rule
Where the pension member dies at age 75 or over, beneficiaries may also face income tax when they draw down inherited funds, on top of any inheritance tax already charged. Where a non-exempt beneficiary is a higher or additional rate taxpayer, the combined effective rate has been estimated at up to 67%, the outcome that coordinated planning between drawdown strategy and estate planning can help mitigate.
Practical steps to consider before April 2027
With implementation now around nine months away, we’d encourage clients with meaningful pension wealth to begin reviewing their position now:
- Review your expression of wishes and will together, so nominations reflect the new tax treatment; it may now be more efficient to nominate a spouse ahead of children.
- Reconsider the order in which you draw on your assets in retirement, since leaving pensions until last may no longer be the most tax-efficient approach.
- Model the combined effect of inheritance tax and income tax on funds likely to be inherited, particularly for higher rate taxpayers.
- Take advice on lifetime gifting and wider IHT planning if your wealth spans both pension and non-pension assets.
How we can help
These changes touch on pension planning, inheritance tax, income tax and estate administration all at once, exactly the kind of cross-disciplinary issue our tax and financial planning teams at Affinity Associates deal with regularly. Whether you’re reviewing your own plans or acting as a personal representative, we’d recommend getting ahead of this before April 2027. Get in touch with our team to arrange a review.
Author
Mukund is a founding member of the Affinity Associates Group and has been with the practice for nearly 40 years. After completing his degree in Accounting and Finance, he went on to qualify with both ACCA and ICAEW in 1991. Over the years, he’s built deep expertise in consultancy, tax, business development, and corporate group structures. Mukund is known for helping clients make sense of complex financial challenges and turning them into opportunities for sustainable growth.
