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30 Sept 2025

Will my pension be subject to inheritance tax?

Pensions are currently exempt from inheritance tax, but from April 2027 that will no longer be the case

Paul Davies

In this article

Are pensions subject to inheritance tax?
How does inheritance tax work?
What happens to my pension when I die?
What if I'm already taking an income from my pension?
Will defined benefit pensions be subject to inheritance tax?
How will inheritance tax be calculated?
How can I avoid inheritance tax?
Can I insure against an inheritance tax bill?

Are pensions subject to inheritance tax?

Not yet. Under current rules, money held in pensions is exempt from inheritance tax. Because of this, pensions have been seen as a tax-efficient way to pass on wealth.

However, from 6 April 2027, any unspent pensions will count towards the value of your estate when inheritance tax is calculated. If the total value of your estate exceeds the tax-free thresholds, inheritance tax will be payable.

An extra 10,500 estates will become liable to pay inheritance tax in 2027-28 when pensions are brought into inheritance tax calculations, according to analysis from HMRC.

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How does inheritance tax work?

Most people don't have to pay inheritance tax. That's because it's only charged if the value of your estate exceeds the available tax-free allowances. Any amount above these thresholds is usually taxed at 40%.

A surviving spouse or civil partner never pays inheritance tax on anything you leave them when you die, regardless of the amount, as long as you’re both domiciled in the UK (meaning it’s your permanent home).

Everyone has a tax-free allowance of £325,000, known as the nil-rate band.

There’s an extra allowance of up to £175,000 (the residence nil-rate band) if you leave your main home to your children or grandchildren.

For estates worth more than £2m, HMRC reduces the residence nil-rate band by £1 for every £2 over that amount. This means estates worth £2.35m or more lose this allowance completely.

If you’re married or in a civil partnership, your partner will inherit your unused allowances. This means that if you leave your estate to your spouse, they can pass on up to £1m tax-free.

Find out more: calculate your inheritance tax bill

What happens to my pension when I die?

Until April 2027, inherited pensions are exempt from inheritance tax, but if you’re 75 or over when you die, your beneficiaries will normally have to pay income tax when they withdraw money from your pension.

If you die before you reach 75, you can usually pass your defined contribution pension tax-free to a nominated beneficiary (up to £1,073,100).

These rules will remain in place after pensions are brought into the scope of inheritance tax. As a result, beneficiaries of those who die over the age of 75 could face an effective double taxation rate of 52%, 64% or 67% depending on whether they are a basic, higher or additional rate taxpayer.

Find out more: who will inherit my pension?

What if I'm already taking an income from my pension?

If you’ve started taking money from your defined contribution pension, either through drawdown or lump sum withdrawals, any unspent funds will count towards your estate for inheritance tax purposes from 2027.

The same applies if you’ve moved money into drawdown, but haven’t taken any out yet.

However, income from annuities will not be subject to inheritance tax.

This applies regardless of whether you bought a single-life annuity (where payments stop when you die) or a joint-life annuity, where payments continue to be made after your death (usually to a spouse or civil partner).

Find our more: your options for accessing your pension

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Will defined benefit pensions be subject to inheritance tax?

Unlike defined contribution schemes, defined benefit pensions – also known as final salary pensions – provide a guaranteed income for the rest of your life.

When you die, they often continue to pay out – albeit at a reduced level – to your spouse or civil partner. Even after the April 2027 rule change, these payments won’t be subject to inheritance tax.

Lump sum death benefits from these schemes, including death in service payments, will also be exempt.

How will inheritance tax be calculated?

The tables show how your tax bill could increase under the new rules based on the following scenario:

Your estate, excluding pensions, is worth £800,000
This includes a main home worth £500,000, which you're leaving to your children
The total value of your defined contribution pensions is £400,000

If you have a spouse or civil partner:
	Amount covered by tax-free thresholds	Amount subject to tax	Tax bill
Current position (on surviving partner's death)	Up to £1m	£0	£0
From April 2027	Up to £1m	£200,000	£80,000

If you're single or divorced:
	Amount covered by tax-free thresholds	Amount subject to tax	Tax bill
Current position	Up to £500,000	£300,000	£120,000
From April 2027	Up to £500,000	£700,000	£280,000

How can I avoid inheritance tax?

One of the simplest ways to reduce or avoid an inheritance tax bill is to give money away during your lifetime.

Gifts made using the following allowances will never be subject to tax:

Allowance	Value	Rules
Main allowance	Up to £3,000 each tax year	Can be split between however many people you like. Unused allowance can be carried forward to the next tax year, but not beyond that.
Small gifts	£250 per person	You can make unlimited tax-free gifts of up to £250 per person, as long as you have not used another allowance on the same person.
Wedding gifts	Up to £5,000	The limit is £5,000 for children, £2,500 for grandchildren and £1,000 for others.
Gifts out of income	No set limit	Must be from surplus income and paid on a regular basis.
Charity donations	Unlimited	Under current rules these are not subject to inheritance tax, so long as certain conditions are met.

Gifts that fall outside the set gifting allowances are called potentially exempt transfers (PETs).

These gifts can become taxable if you die within seven years of making them, but often that doesn't happen because your £325,000 nil-rate band covers gifts made in that time before it applies to the rest of your estate.

If tax does end up being payable on a PET, it's charged on a sliding scale based on when the gift was made. It’s 40% if you die within three years, but goes down with each year after that – eventually to 8% if you made the gift between 6 and 7 years before your death.

Can I insure against an inheritance tax bill?

You can take out a whole-of-life insurance policy for all or part of the estimated inheritance tax bill and have it written into trust so the eventual payout doesn’t form part of your estate for tax purposes.

You pay the monthly premiums and when you die the trustees (your beneficiaries) can use the proceeds to promptly settle the tax bill without having to wait to go through probate.

If you’re married or in a civil partnership, the best option is a ‘joint-life, second-death’ policy. This means that both of your lives are insured but the policy will only pay out to your beneficiaries on the second death.

The first death doesn’t need to be insured as the surviving spouse will inherit tax-free.

Find out more: what is life insurance and how does it work?