Will My Pension Be Hit by Inheritance Tax? What Changes in April 2027

If you have glanced at the money pages at any point in the last year, you will have seen the headlines: pensions are being pulled into inheritance tax. It has easily been the question we are asked most in 2026, and it is not hard to see why.

For years the standard thinking for anyone with other savings was simple. Spend your other money first and leave the pension until last, because it usually sat outside your estate. From next April, that changes.

What is actually changing?

From 6 April 2027, most unused pension funds and pension death benefits will be counted as part of your estate for inheritance tax. This is no longer a proposal. It became law in the Finance Act 2026 in March, and it applies to deaths on or after that date.

What is caught

•      Defined contribution pensions, such as personal pensions, SIPPs and most workplace pensions, whether you have started drawing from them or not.

•      Inherited pensions that are still sitting in drawdown.

What is not

•      Death-in-service benefits paid from a registered pension scheme.

•      Pension money left to a spouse or civil partner. This stays exempt, just as it does for your other assets.

•      Pension money left to a registered charity.

There is a practical change as well. It will be your executors, rather than the pension scheme, who are responsible for reporting and paying any inheritance tax due on the pension. That adds a layer of admin at an already difficult time, and it is worth your executors knowing where everything is.

The allowances have not moved

The nil-rate band is still £325,000, and the residence nil-rate band is up to £175,000 where your home passes to children or grandchildren. Both are frozen until April 2031. Married couples and civil partners can pass unused allowances to each other, so in the right circumstances a couple can leave up to £1 million before inheritance tax applies. Above that, the rate is 40%.

There is a trap worth flagging. The residence nil-rate band starts to shrink once an estate is worth more than £2 million, falling by £1 for every £2 above that. Adding a pension into the estate could push some families over that line, so they pay tax on the pension and lose some of their allowance at the same time.

A MoneyMatters Example

Imagine a widow with a house worth £500,000, £150,000 in savings and ISAs, and a pension of £500,000 she has barely touched. Her late husband left everything to her, so she has his unused allowances too, giving her £1 million in total.

	Before April 2027	From April 2027
Value of estate for IHT	£650,000	£1,150,000
Available allowances	£1,000,000	£1,000,000
Taxable amount	Nil	£150,000
Inheritance tax at 40%	Nil	£60,000

Illustrative only, assuming the home passes to direct descendants and both full nil-rate bands and residence nil-rate bands are available. Real cases involve other factors, including lifetime gifts.

Same person, same money, a £60,000 difference purely because of the rule change.

The over-75 sting

If you die after your 75th birthday, your beneficiaries already pay income tax, at their own rate, on anything they draw from an inherited pension. From 2027 that sits on top of any inheritance tax. The two taxes interact, and on some of the money the combined rate can reach around 67% (ouch) for a beneficiary paying additional-rate tax. For families with larger pensions, this is where the real impact lies.

What are people doing about it?

There is no single fix, and what works well for one family can be a poor idea for another. These are the areas we are discussing with clients most often:

•      Checking expression of wish forms. Many are years out of date. Who you nominate, and in what order, matters more than ever.

•      Rethinking the order you spend in. Drawing more from a pension during your lifetime, using lower tax bands, rather than preserving it at all costs.

•      Gifting. Regular gifts from surplus income can fall outside your estate straight away if the conditions are met (keep good records). Larger gifts usually need you to survive seven years.

•      Helping the next generation save. Contributing to a child's or grandchild's pension, where they receive tax relief on it.

•      Life insurance written in trust. Used to meet a likely inheritance tax bill, so the family is not forced to sell assets.

•      Wills and trusts. Often the missing piece. We work alongside solicitors where this is needed.

A word of caution. Some of these create a tax bill today to save one later, and taking large sums out of a pension can easily push you into a higher tax band. The order matters, and so does not acting in a rush.

Do not panic, but do not wait either

Importantly the change is just over six months away, and the Autumn Budget on 28 October may bring more detail. Most of the sensible planning takes a little time, particularly anything involving gifts, trusts or reviewing how you draw your income.

If you have a pension you were planning to pass on, or you are simply not sure whether your estate is affected, now is a good time for a review. We help families across Norfolk, Suffolk and Essex with inheritance tax planning, and an initial conversation is without obligation. Get in touch and we will take it from there.

Important information

This article is for general information only. It is not financial advice or a personal recommendation, and you should not act on it without taking advice based on your own circumstances.

It reflects our understanding of UK tax rules and legislation for the 2026/27 tax year as at September 2026. Tax rules and allowances can change, including at the Autumn Budget on 28 October 2026, and how they apply to you depends on your individual circumstances.

The value of investments, and any income from them, can fall as well as rise and you may get back less than you put in. Past performance is not a reliable indicator of future results. Pensions are long-term investments and you cannot normally access them until age 55 (rising to 57 from 6 April 2028).

The Financial Conduct Authority does not regulate tax advice, estate planning, will writing or trusts. Inheritance tax planning can involve complex legal and tax matters and you may need specialist legal advice. The example shown is illustrative only.

MoneyMatters 2u UK Ltd is authorised and regulated by the Financial Conduct Authority (FRN 599247).