What’s changing

The pension you’ve spent your working life building was always supposed to be different from everything else you own. Unlike your house, your savings, your ISA — your pension pot, if you died before using it all, would pass to your family free of inheritance tax. That was the deal. It made pensions one of the most powerful estate planning tools available to ordinary people.

From that date, unused pension pots will be brought within the scope of inheritance tax for the first time. If your estate — now including your pension — exceeds the inheritance tax threshold, 40% tax will be due on the excess. For millions of families who planned their financial lives around pensions being IHT-free, this changes everything.

This guide explains exactly what’s happening, who it affects, and what you can do about it.

What exactly is changing?

Until 5 April 2027, unused defined contribution (DC) pension pots sit entirely outside your estate for inheritance tax purposes. When you die, the pension trustees can pay the pot to whoever you’ve nominated — usually a spouse or children — completely free of IHT, regardless of how large it is.

From 6 April 2027, unused DC pension pots will be included in your estate for IHT purposes. The full value of your pension at death will be added to the value of your property, savings, and other assets. If the combined total exceeds your inheritance tax threshold, 40% tax will be due on everything above that threshold — including the pension.

Who is affected?

Not everyone will be affected — but far more people than the government’s headline figures suggest.

You are likely to be affected if:

• You have a defined contribution pension (including a SIPP, personal pension, or workplace DC scheme) with meaningful undrawn funds
• Your total estate — property, savings, ISA, other assets, and now your pension — exceeds the nil-rate band
• You planned to leave your pension to your children or other non-spouse beneficiaries as part of your estate plan

You are less likely to be affected if:

• You have already drawn down most or all of your pension
• Your total estate (including pension) falls below the inheritance tax threshold
• Your pension is a defined benefit (final salary) scheme — these are treated differently (see below)
• You are leaving your entire estate to a spouse or civil partner, who inherits IHT-free regardless

The government estimates that around 38,500 additional estates will face IHT bills as a result of this change, and a further number will face higher bills than they would have done previously. However, many more families will be affected in the sense that they need to review their financial planning — even if they do not ultimately owe more tax.

What is the inheritance tax threshold?

Everyone has a nil-rate band of £325,000 — the amount they can leave without any IHT. If you die leaving assets above this amount, 40% tax is due on the excess.

There are two important additions to this:

The Residence Nil-Rate Band (RNRB): If you own your home and leave it to direct descendants (children, grandchildren), you get an additional nil-rate band of £175,000. This takes the effective threshold to £500,000 for a single person owning their home.

Transferable nil-rate bands for married couples: When a spouse or civil partner dies, any unused nil-rate band passes to the surviving partner. This means a married couple can effectively leave £1,000,000 (combining both nil-rate bands and both RNRBs) before any IHT is due.

From 2027, your pension pot will be added to all your other assets before comparing to these thresholds. If the combined total exceeds your threshold, 40% tax applies to the excess — including the proportion attributable to your pension.

The double taxation problem

For those who die aged 75 or over, the situation is potentially even more severe.

Under the current rules, beneficiaries who inherit a pension from someone who died over 75 pay income tax on any withdrawals they make from the inherited pot (at their own marginal rate). This income tax has always applied to inherited drawdown funds from those who die over 75.

From April 2027, the inheritance tax will apply first — reducing the pot by 40%. Then, when beneficiaries withdraw what’s left, they pay income tax on top. For a higher-rate taxpayer inheriting from someone who died over 75:

• 40% IHT on the pension pot — 40% income tax on what’s left

This creates an effective combined rate of up to 64% on the pension value — or 67% for additional-rate taxpayers. For a £300,000 pension pot, this could mean the family actually receives as little as £100,000.