Your pension is about to become part of your estate

From 6 April 2027, most unused pension funds and pension death benefits will count as part of your estate for inheritance tax. Until then, they sit outside it.

That one sentence undoes a decade of sensible planning. If you were told to spend your ISAs and savings first and leave the pension untouched for as long as possible, you were told the right thing at the time. The arithmetic behind it has now changed.

This is not a proposal or a consultation. It passed through Parliament in the Finance Act 2026, which received Royal Assent on 18 March 2026. Nothing further has to happen for it to take effect.

Most of what has been written about it since is either a headline or a technical note for advisers. What follows is the version I would give you across a table.

i. What actually changes.

Today, if you die with money still in your pension, it passes to whoever you nominated without any inheritance tax at all. It has been one of the few genuinely clean exits in the UK tax system. That is precisely why so many people stopped drawing on their pension and lived off other savings instead.

From 6 April 2027, HMRC adds the unused pension to everything else you own and calculates inheritance tax on the total. Above your allowances, the rate is 40%.

The allowances have not moved to compensate. The nil-rate band is still £325,000. The residence nil-rate band, for a home passing to children or grandchildren, is still £175,000. Both stay frozen until April 2031. A married couple leaving everything to each other and then to their children can shelter £1 million between them. That figure has not risen since 2020, and it now has to stretch across an asset class it never used to cover.

One detail matters more than any other, and it is easy to misread. The trigger is the date of death, not the date the pension pays out. If someone dies on 5 April 2027 and the money is paid in September, the old rules apply.

ii. What isn’t caught.

The change is narrower than the headlines suggest. Four things stay outside it.

Death in service benefits. If your employer’s scheme pays a lump sum because you died while still working there, that stays free of inheritance tax. For most people still in work, this is the largest single sum their family would ever receive, and it is untouched.

Dependants’ scheme pensions. The ongoing pension a final salary scheme pays your widow, widower or children is not caught.

Joint life annuities. If you bought an annuity that carries on paying a survivor, that continuation sits outside the charge.

Anything left to your spouse or civil partner. The spousal exemption survives intact. Leave your pension to your husband or wife and there is no inheritance tax on the first death, exactly as now. The bill arrives on the second death, when the money passes to the children.

Gifts to charity stay exempt as well, and a pension left to charity still counts towards the 10% test that drops the rate on the rest of an estate from 40% to 36%.

iii. What it costs.

Take a widower who dies in 2028, aged 78. He owns a flat worth £300,000, which goes to his daughter, and he has £500,000 left in a drawdown pension.

Under today’s rules, the taxable estate is the flat on its own at £300,000. His £325,000 nil-rate band covers it. Inheritance tax: nothing. His daughter then draws the pension and pays income tax on it at her marginal rate, because he died after 75.

From April 2027, the estate is £800,000. His allowances are £325,000 plus £175,000 for the flat, so £500,000 in total. The excess is £300,000, taxed at 40%.

Inheritance tax due: £120,000. None of it was payable before.

His daughter still pays income tax on the pension when she draws it. Parliament did fix the worst version of this: income tax is not charged on the slice of the pension that has already gone to HMRC as inheritance tax, so the same pound is not taxed twice. That is a real improvement on what was originally proposed, and it deserves more credit than it has had.

It still stings. Where the beneficiary is a higher earner and takes the whole pot in a single tax year, the combined bite gets close to 60p in the pound. Spreading withdrawals across several tax years, and across more than one beneficiary, moves that number a long way. That part sits within your family’s control, and it is far better decided in advance than in the fortnight after a funeral.

Plan for this and it becomes a number on a spreadsheet. Ignore it and it becomes a decision your children make while grieving, on a six-month deadline.

iv. The £2 million line.

This is the part almost nobody has been told about, and it catches people who have never thought of themselves as wealthy.

The residence nil-rate band, that extra £175,000 each for leaving a home to direct descendants, starts to disappear once your estate passes £2 million. You lose £1 of it for every £2 above the line. By £2.35 million a couple’s combined £350,000 has gone entirely.

Pensions have never counted towards that £2 million test. From 6 April 2027 they do.

So a couple with £1.8 million in property and investments, sitting comfortably below the line as they understood it, find themselves at £2.3 million once a £500,000 pension joins the calculation. They are £300,000 over. Their combined residence allowance falls by £150,000, and the tax on that lost relief is £60,000 — on top of the tax on the pension itself.

If you are anywhere near £2 million with the pension included, this is worth an afternoon with a calculator.

v. Who pays, and when.

Your executors carry this. They have to report the pension to HMRC and settle the tax, and the deadline is the end of the sixth month after death — the same deadline as the rest of the estate.

They have three routes. They can pay from the estate’s own cash before probate. They can instruct the pension scheme to pay HMRC directly, which the scheme must do within 35 days for amounts over £1,000. Or the beneficiary can take the money, pay the tax and reclaim any income tax overpaid.

Two protections exist for whoever is administering all this. Scheme administrators have to supply a valuation within 28 days of being asked. And executors can serve a withholding notice, freezing up to half of a taxable benefit for up to 15 months while the tax position is worked out — useful when they suspect a bill but cannot yet put a figure on it.

The practical consequence is worth sitting with. Whoever you named as executor now has a harder job, on a fixed deadline, dealing with institutions they have no relationship with. If you appointed a family member years ago on the assumption the estate would be straightforward, that assumption has changed.

vi. What to do now, and what not to rush.

Check your expression of wish forms. Cheapest thing on this list and the most neglected. Most were filled in when you joined the scheme and never looked at again. Leaving a pension to a spouse defers the charge entirely; leaving it straight to adult children does not. Make sure the form says what you would say today.

Look at the order you draw your money. For years the sensible sequence was savings first, pension last. For some people that now runs backwards. I would not reverse it on principle, though. Pensions still grow free of income tax and capital gains tax, and drawing money out early to avoid a tax you may never face is its own kind of mistake — particularly if it then sits in a bank account losing ground to inflation inside your estate anyway.

Consider gifting, with your eyes open. Money given away outright falls out of your estate after seven years. The seven-year rule came through the Autumn Budget 2025 unchanged, as did taper relief, and no lifetime cap was introduced. There is also the exemption for regular gifts made out of surplus income, which is generous, widely underused, and depends on keeping proper records from the very start.

Price up the alternative. For some families a whole-of-life policy written in trust, funded from income, costs less than the tax it covers. For others it is poor value. It turns on your age, your health and the size of the liability.

What I would not do is act before you know your own number. The change is real and the deadline is fixed, but the worst response to either is an irreversible decision made from a headline. Giving capital away in your seventies to avoid a tax your family may never pay is a bad trade, and you cannot undo it.

Almost everyone I speak to about this arrives with one of two assumptions: that it does not apply to them, or that it is a catastrophe. Both are usually wrong. You find out which by adding your pension to everything else you own and seeing where the total sits against £1 million, and against £2 million.

That is an afternoon’s work. Do it now and you have eight months to act on what you find. Leave it and your family has six.

When I model an estate, this is where I start: the total including the pension, the allowances actually available, and what the bill looks like on the second death rather than the first. It is the same exercise as working out how long a pension needs to last, run from the other end.

— Andrew

Andrew Daw is an independent financial planner based in Bath, working with clients across Bath, Bristol and the South West. Sources for this article: HMRC technical note on Inheritance Tax on pensions, HMRC policy paper on unused pension funds and death benefits, and the Finance Act 2026. Figures are for the 2026/27 tax year.