19th October 2026
If you have been leaving your pension untouched so that more of it can pass to your family, it is time to review that plan. For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will count towards the value of an estate for Inheritance Tax purposes. This does not mean every pension will attract tax, but it could change how much your beneficiaries receive.
Many people have planned their retirement spending around the current rules, using savings and investments first while preserving their pension for the next generation. The changes mean that keeping pension wealth separate from other assets may no longer produce the inheritance they expected.
Sophie Cundy, Solicitor in our Wills and Probate team, explains how the changes could affect your estate and what to consider before updating your plans.
Under the Finance Act 2026, most unused pension funds and pension death benefits will be included in the Inheritance Tax calculation when someone dies on or after 6 April 2027. The change applies to existing pension savings, not just contributions made after that date.
The reforms principally affect personal pensions, workplace defined contribution pensions and self-invested personal pensions, commonly known as SIPPs. Some lump sums and other death benefits associated with defined benefit pensions will also fall within the rules. The treatment depends on the benefits payable, rather than simply the name of the pension scheme.
Certain benefits remain excluded, including qualifying death-in-service benefits, dependants’ scheme pensions and some joint-life annuity benefits. Pension benefits passing to a spouse, civil partner or charity can generally qualify for an Inheritance Tax exemption, although the relevant conditions still need to be met. These exemptions are distinct from benefits being excluded from the calculation altogether.
The date of death determines which rules apply. If someone dies before 6 April 2027, the current rules apply even if their beneficiaries receive the pension benefits later.
Most discretionary defined contribution pensions currently sit outside the estate for Inheritance Tax purposes. Bringing them into the calculation could make an estate taxable for the first time or increase an existing liability.
The effect will depend on the combined value of your assets, who inherits them and the allowances, exemptions and reliefs available. The main allowances currently include:
The nil-rate band, normally £325,000.
The residence nil-rate band, worth up to £175,000 where a qualifying home passes to direct descendants and the relevant conditions are met.
Unused allowances may also be transferable between spouses and civil partners. Inheritance Tax is generally charged at 40% on the value above the available allowances, after applicable exemptions and reliefs.
Pension wealth can have a further effect on larger estates. Where the estate exceeds £2 million, the residence nil-rate band begins to reduce. Including a pension could therefore increase the taxable estate while also reducing the additional allowance available when leaving a home to children or grandchildren.
The important question is not simply how much is in your pension. It is how that pension changes the overall position when considered alongside your home, savings, investments and other assets.
Not necessarily.
Pension benefits passing to a spouse or civil partner can generally qualify for the spouse exemption. An unmarried partner does not receive that exemption simply because you have lived together for many years or share your finances.
A pension nomination can tell the scheme whom you would like to benefit, but it does not create an Inheritance Tax exemption. For an unmarried couple, this could mean that pension savings intended to support the surviving partner contribute to a tax liability instead.
If your partner would rely on your pension after your death, reviewing the nomination alone is not enough. Your Will, ownership of your home and wider estate arrangements should support the same intentions.
Yes.
Inheritance Tax and Income Tax can both apply to inherited pension benefits. The Income Tax treatment depends on factors including the type of benefit, your age when you die and how and when the beneficiary receives the money.
Where Inheritance Tax is paid in relation to pension death benefits, the portion corresponding to that tax, and relevant interest, does not count towards the beneficiary’s taxable pension income. However, the remaining benefits may still be subject to Income Tax. It would therefore be misleading to assume that paying Inheritance Tax removes any further tax liability.
This interaction matters when comparing different ways of providing for your family. A decision that appears sensible when looking only at Inheritance Tax may have a different outcome once Income Tax and your retirement needs are considered.
A change in the Inheritance Tax rules is a reason to review your pension strategy, not an automatic reason to withdraw money.
A withdrawal may create an immediate Income Tax charge. If the money remains in your bank account or is reinvested outside the pension, it will generally still form part of your estate. Giving it away can introduce separate Inheritance Tax considerations, while reducing the funds available for your own retirement.
The position needs particular care where a pension holds commercial property or other assets that cannot readily be converted into cash. Business owners with a SIPP or small self-administered scheme, known as a SSAS, should consider how any tax attributable to the pension could be funded without assuming that property can be sold quickly.
Business Property Relief and Agricultural Property Relief do not apply to the pension value simply because the pension holds assets that might otherwise qualify. The pension member is not treated as owning those underlying assets for these reliefs.
Any changes to pension withdrawals or investments should be considered with a regulated financial adviser, alongside legal advice about your estate. Protecting an inheritance should not leave you without the income or flexibility you may need later in life.
A useful review brings your pension arrangements and estate planning together, rather than treating each document or asset separately.
Gather current information about your pensions, property, savings, investments and other significant assets. This provides a starting point for assessing whether including pension wealth could create or increase an Inheritance Tax liability.
The aim is to understand the likely exposure before deciding whether anything needs to change.
Your pension will not automatically pass under your Will simply because it becomes part of the Inheritance Tax calculation. Scheme rules and, in many cases, trustee discretion will still determine who receives the benefits.
Review each expression of wishes, sometimes called a pension nomination, particularly if you have married, divorced, lost a beneficiary or experienced other family changes. Your Will and nominations should reflect your current wishes without assuming that one overrides the other.
The same pension arrangement may have different consequences depending on whether benefits pass to a spouse, civil partner, unmarried partner, child or charity. Consider the likely tax position alongside each person’s financial needs, rather than looking only at the headline value of their inheritance.
Under the new rules, executors and other personal representatives will be responsible for reporting relevant pension benefits and paying the Inheritance Tax due. They will need to identify pension arrangements and obtain information from the providers. Beneficiaries can also become jointly liable for tax attributable to their pension benefits.
Keeping an up-to-date list of pension providers, policy details and relevant contacts can make that responsibility easier. Personal representatives may also need to arrange for part of a pension benefit to be withheld while the tax position is resolved, so families should not assume that all benefits will be available immediately.
Our Wills and Probate team can help you review whether your existing estate plans still reflect what you want to leave and whom you want to provide for. Our Inheritance Tax Planning service considers your family circumstances and wider financial position, rather than looking at individual assets in isolation.
We can review your Will, explain the legal implications of your intended arrangements and work alongside your financial adviser where pension decisions need specialist financial advice. Bringing those discussions together can help you make informed choices without losing sight of your own future needs.
If you are concerned about how the April 2027 pension changes could affect your family, give us a call on 01782 491045, or make an enquiry to find out how we can help.
