The Government has announced a major change to how unused pension funds and some death benefits are treated for inheritance tax (IHT). From 6 April 2027, most of these funds will be brought into the estate for IHT purposes.
If you have pensions that you’re not planning to fully use in retirement, or if you’re an executor dealing with an estate that includes pension assets, this is a big shift you need to be aware of.
What’s Changing?
Pensions Will Be Counted for IHT
At the moment, many pension pots (particularly those in discretionary schemes) sit outside the estate for inheritance tax. From April 2027, that largely ends.
Unused pension funds and pension death benefits will now count towards the value of the estate.
Exemptions Still Apply
Not everything will be caught. Transfers to:
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Spouses and civil partners
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Registered charities remain exempt.
In addition, death-in-service lump sums from registered pension schemes and dependants’/joint annuities will not be included.
Executors Will Be Responsible
The onus is on personal representatives (executors), not pension providers, to report the value of pension funds and ensure any IHT is paid.
Pension providers will need to supply valuations within four weeks of being told about the death. Executors then have six months to pay the tax.
How Many People Will Be Affected?
HMRC estimates:
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213,000 estates will have pension assets to report in 2027–28.
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10,500 estates will pay IHT where none would have been due under the old rules.
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38,500 estates will pay more than they would have before.
The average extra bill? Around £34,000.
This is projected to raise £640 million in 2027/28, increasing to £1.46 billion by 2029/30.
Why Is This Happening?
The Government says this change is about fairness and closing a tax loophole. At present, pensions can be used as a tax-efficient way to pass on wealth — in some cases more tax-efficient than other forms of inheritance.
By including these funds in the IHT calculation, the rules on pensions are being brought into line with other assets.
Why Are People Concerned?
This reform hasn’t been without criticism.
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Administrative burden – Executors will now need to track down all pensions (sometimes from multiple providers) and get valuations quickly.
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Payment deadlines – IHT is due within six months. For estates with illiquid assets (property, family businesses, or SIPP investments), this could mean selling assets or using the new HMRC payment scheme.
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Impact on unmarried partners – Unlike spouses and civil partners, cohabitants don’t get the same exemptions and may face unexpected tax bills.
What Does This Mean for You?
If You’re Planning Your Estate
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Keep your pension records up to date – make it easy for your executors to find everything.
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Review your beneficiary nominations – especially if you want to minimise IHT exposure for loved ones.
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Consider drawing down funds in retirement or gifting where appropriate (within allowances).
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Get advice – particularly if your pensions hold complex or illiquid assets.
If You’re an Executor
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Act fast – notify pension providers as soon as possible.
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Gather valuations early – you’ll need them to complete the IHT400 form.
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Prepare for payment – think ahead about how any IHT due will be funded.
In Summary
From April 2027, most unused pensions will be part of the inheritance tax calculation. Executors will carry the reporting and payment responsibility, and for many families, this will mean larger IHT bills and tighter administration deadlines.
Good planning can help. Whether that’s reviewing your pensions now or preparing executors for what’s coming, taking action early could save time, stress, and money.
HMRC Guideance: Read More
Disclaimer:
This content is based on our understanding of the proposed rules at the time of writing. It is provided for general information only and does not constitute legal, tax, or financial advice. You should seek independent professional advice before taking any action. We accept no liability for any decisions made based on this information.
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