Do You Pay Inheritance Tax on Pensions?

Pension Inheritance Tax: What the Rules Are and What's Changing

Pension inheritance tax is, currently, largely not a thing — most pension pots sit outside your estate and pass free of Inheritance Tax. That position is about to change significantly. From 6 April 2027, pension inheritance tax will become a real cost for many estates. If your pension forms part of your wealth planning, understanding both where pension inheritance tax stands now and what's coming matters more urgently than it might feel.

The current position: why pension inheritance tax doesn't usually apply

Under the current rules (as of 2025/26), pension inheritance tax is generally not a charge most estates face. Most defined contribution pension pots sit outside your estate for Inheritance Tax purposes.

The reason is the way pension death benefits are structured. In most cases, pensions are set up as discretionary trusts. When you die, the pension trustees — not you — decide who receives the funds. Because it's their discretion rather than a right you've passed on, the pension doesn't legally form part of your estate, and pension inheritance tax does not apply.

HMRC's Inheritance Tax Manual is clear on this: discretionary lump sum death benefits are generally not chargeable to IHT. The exception arises if the payment is made to your estate as of right, or if you've made a binding nomination to a named beneficiary. In those cases, pension inheritance tax can apply.

The implication for anyone with a large pension: it has been, by design or accident, an extremely efficient way to pass wealth down a generation. Unused pension funds, particularly if you have other income in retirement, can pass to beneficiaries free of both IHT and, in some circumstances, Income Tax.

Income Tax on pension death benefits: the age-75 rule

Separate from IHT, there is an Income Tax distinction that applies based on your age at death.

If you die before 75: Most lump sums paid from a defined contribution pension to a nominated beneficiary are tax-free, subject to:

• The lump sum being within your remaining Lump Sum and Death Benefit Allowance (£1,073,100 at 2025/26 rates)
• The payment being made within two years of the provider being notified of your death

If the payment exceeds your remaining allowance, or is paid after the two-year window, the excess is taxed as income on the beneficiary.

If you die at 75 or older: Lump sums and drawdown income paid to beneficiaries are subject to Income Tax at the beneficiary's marginal rate. The pension provider deducts tax before payment.

There is no IHT at this stage under current rules — just Income Tax on what the beneficiary receives.

The April 2027 change

This is the material issue for anyone using their pension as part of an estate plan.

HMRC has published a policy paper stating that from 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a person's estate for Inheritance Tax purposes. The measure applies to deaths on or after 6 April 2027.

The mechanism is that pension trustees and scheme administrators will need to report the pension value to HMRC as part of the estate, and IHT at 40% will apply on the total estate value above the nil-rate band and any applicable reliefs.

Death-in-service benefits paid from a registered pension scheme are excluded from this change.

The policy paper frames the reform explicitly as addressing distortions created by the post-2015 pension freedoms and the 2024 Lifetime Allowance abolition. Since those changes, retaining money in a pension rather than drawing it became an increasingly attractive IHT-planning strategy. The government's position is that pensions should primarily fund retirement, not estate planning.

What this means in practice

For most people with modest pensions, the change has limited immediate impact. If your total estate including pension is below the nil-rate band thresholds (£325,000 standard, up to £1 million with residence nil-rate band and spouse exemption), IHT doesn't apply regardless.

For those with large, unused pension pots — typically people who have other income in retirement and have been drawing down slowly or not at all — this reform materially changes the calculation. A £500,000 pension pot that currently passes IHT-free could, from April 2027, face a charge of up to £200,000 depending on the overall estate.

The structural interaction with other estate assets matters too. The sequencing of which assets you draw down first in retirement — pension versus ISAs versus other savings — has always had tax implications. From April 2027, the pension piece changes significantly, which may affect the optimal draw-down order.

Nominating a pension beneficiary

Regardless of the IHT reform, completing an expression of wishes form with your pension provider remains important. Naming a pension beneficiary gives the trustees clear guidance on who you want the benefits to go to.

It doesn't legally bind the trustees, but a clear pension beneficiary nomination significantly speeds up the payment process and reduces the risk of funds going somewhere you didn't intend. Without a completed nomination, the trustees have to make that determination themselves, which slows the process and may not align with your intentions.

Review your pension beneficiary nomination when your family circumstances change: marriage, divorce, birth of children or grandchildren, death of a previously nominated person.

What to do before April 2027

This is a planning risk rather than a current charge. As of April 2025/26, pensions are still largely outside the estate for IHT. There's time to take advice, review draw-down strategies, and understand how the reform intersects with your specific asset mix.

The most actionable step right now is to understand what you have. What is the likely value of your pension pot at death if you draw down at your current pace? What does your estate look like overall? How does the proposed change affect the IHT position?

For anyone with significant pension and non-pension assets, this is a conversation worth having with a financial planner before the reform takes effect.

---

Key takeaway: Pensions currently sit largely outside your estate for IHT, but that ends for deaths on or after 6 April 2027. The reform is announced and on its way. If pension wealth forms part of how you're thinking about passing assets to the next generation, now is the time to model what that change means for your specific position.

---

Frequently asked questions

Is a pension subject to inheritance tax?

Currently, most pension pots sit outside your estate for Inheritance Tax purposes, because payment is typically at the discretion of the pension trustees rather than paid to the estate as of right. That changes from 6 April 2027, when most unused pension funds and death benefits are planned to be brought within scope of IHT.

What happens to my pension when I die?

For defined contribution pensions, your pot can be passed to a nominated beneficiary. If you die before 75, it's usually tax-free (subject to the Lump Sum and Death Benefit Allowance). If you die at 75 or older, your beneficiary pays Income Tax on withdrawals at their marginal rate.

What is the April 2027 pension IHT reform?

From 6 April 2027, most unused pension funds and pension death benefits are planned to be brought within the value of a person's estate for Inheritance Tax purposes. IHT would then apply at 40% on the pension value above the nil-rate band. Death-in-service benefits from a registered pension scheme are excluded.

Does the 2-year rule apply to pension death benefits?

Yes. For the tax-free treatment to apply to lump sum death benefits where the member dies before 75, the payment must be made within two years of the pension provider being notified of the death. Payments made after two years lose the tax-free status and are taxed as income.

Should I nominate a beneficiary for my pension?

Yes. Completing an expression of wishes (nomination form) with your pension provider does not legally bind them, but it guides their discretionary decision. Without one, the trustees have no indication of who you wanted the money to go to, and the process of identifying and paying beneficiaries is slower.