How inheritance tax will apply to pensions

Upcoming changes to inheritance tax rules will mean pensions are no longer a tax-efficient way to pass on money to loved ones.

From April 2027, pensions will be included as part of your estate when calculating a potential inheritance tax liability – meaning more families will face a tax bill. 

Some 39% of people in our recent survey said that they were concerned about the changes.

Here, we explain what you need to know about the new rules. 

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What's changing – and when?

Unused pensions are currently excluded when the value of your estate is calculated to determine whether inheritance tax is payable. 

But for deaths occurring on or after 6 April 2027, pensions will be treated in the same way as other assets – like property, savings and investments – and will count towards your estate.

Inheritance tax is usually charged at 40% on the value of your estate that exceeds your tax-free allowances.

How many more families will pay inheritance tax?

The government estimates that in 2027-28, 10,500 estates that wouldn't have otherwise owed tax will owe it, and another 38,500 estates will owe an extra £34,000 on average.

However, the proportion of estates that incur a bill will remain relatively small.

• Find out more: inheritance tax calculator.

Can I still pass my pensions tax-free to my spouse?

Yes. A surviving spouse or civil partner never pays inheritance tax on anything you leave them when you die, regardless of the amount, and this will continue to be the case for pensions after April.

Bear in mind that if you're 75 or over when you die, your spouse will have to pay income tax at their marginal rate on money they take from the inherited pension.

• Find out more: what happens to my pension when I die?

Will all pensions be affected?

No, there are some exceptions.

Money that’s left in a defined contribution (DC) pension (including self-invested personal pensions) will be included in your estate for inheritance tax purposes. 

The same goes for lump sum death benefits from a defined benefit (DB) pension.

But where a DB pension pays an income to your spouse or civil partner after your death, this will remain exempt. 

Death-in-service benefits – paid where the scheme member dies while still employed – whether from a DC or DB pension, will also be exempt.

• Find out more: will my pension be subject to inheritance tax?

What if I’m already receiving retirement income?

If you’ve started to take regular income from pension drawdown or via lump sum withdrawals, any unspent funds will count towards your estate from 2027. The same applies if you’ve moved money into drawdown, but haven’t taken any out yet.

Annuities pay you a guaranteed income for life until your death. Single-life annuities will only cover the policyholder and stop paying out when you die. Joint-life annuities, which continue to pay your partner after you die, will still be exempt from inheritance tax. 

Your state pension cannot be inherited.

• Find out more: pension options: what can I do with my pension pot?

Who will be responsible for paying a tax bill?

Personal representatives (loved ones or executors dealing with the estate) will be responsible for locating all of the deceased's pensions and contacting providers for valuations.

They will still face a six-month window from the end of the month of death to settle any inheritance tax due.

However, to make sure funds are available for this, executors can tell providers to withhold up to 50% of pension benefits for up to 15 months. Pension providers will also be able to settle a tax bill directly with HMRC, if asked.

Another way to make it easier for your loved ones to cover a tax bill after your death is to put a life insurance policy in trust. This means the payout is not included in your estate and can be used to settle a bill quickly without waiting for probate.

• Find out more: probate explained.

Could my pension be taxed twice?

If you die after the age of 75, your beneficiaries pay income tax on any withdrawals from your pension.

Concerns have been raised about the prospect of ‘double taxation’, where pension funds could be subject to both income tax and inheritance tax, leaving beneficiaries paying an effective marginal tax rate of up to 64%.

A technical note published by the tax office in May 2026 clarified that, where inheritance tax is due, it will be applied to the pension first.

Beneficiaries will then be eligible for a statutory deduction, meaning they'll only pay income tax on the remaining amount after inheritance tax has been settled. This aims to make sure that the total tax bill is lower than it would have been if both taxes were applied to the full original value of the pension.

How can I minimise inheritance tax?

Inheritance tax is only charged on the value of your estate that exceeds the tax-free thresholds, so by reducing its value you can reduce – or avoid – a potential bill. For example, you could:

• Spend more now: enjoying your pension savings during your retirement will reduce the value of your estate when a potential inheritance tax bill is calculated – although you'll need to be careful not to run out of money too soon. 
  
• Give money to loved ones: there are various gifting allowances you can use so that this money leaves your estate immediately and will never be subject to inheritance tax. Any gifts you make above these limits will fall outside of your estate if you live for seven years after.
• Give to charity: leaving more than 10% of your taxable estate to charity in your will reduces the inheritance tax rate on the rest from 40% to 36%.