Inheritance Tax on Unused Pension Funds from April 2027: What Changes

For decades, an unused pension has been one of the most effective ways to pass wealth to the next generation largely free of Inheritance Tax. From 6 April 2027, that changes, and estates that have never previously had an Inheritance Tax problem are going to acquire one.

What Finance Act 2026 Actually Changed

Since pensions freedoms were introduced in 2015, most defined contribution pension funds have sat outside the deceased's estate for Inheritance Tax purposes, regardless of the size of the fund, provided the scheme administrator or trustees exercised discretion over who received the death benefit. This made an unused pension one of the most tax-efficient ways to pass wealth down a generation, particularly compared with other assets that fall squarely within the estate. Finance Act 2026 removes that distortion. From 6 April 2027, most unused pension funds and pension death benefits are brought within the value of the deceased's estate for Inheritance Tax purposes, in substantially the same way as other assets already are.

What Is Brought Into the Estate

The reform captures most unused defined contribution pension funds remaining at death, together with most forms of pension death benefit paid out following death, regardless of whether the scheme administrator retained discretion over the beneficiary. This applies whether the fund is held in a personal pension, a self-invested personal pension, or most occupational defined contribution arrangements. The change is deliberately broad, reflecting the government's stated aim of removing pensions as a distinct and preferential route for intergenerational wealth transfer, rather than leaving a narrower set of targeted anti-avoidance provisions that more sophisticated planning could work around.

What Remains Exempt

Two categories of benefit remain outside the new charge. Death-in-service lump sum benefits, typically a multiple of salary paid out under an employer's group life assurance arrangement on the death of an employee, are excluded entirely, reflecting their character as a form of life insurance payout rather than accumulated pension savings. Pension death benefits passing to a surviving spouse or civil partner continue to benefit from the ordinary Inheritance Tax spousal exemption, in the same way other assets passing between spouses do, so the immediate impact for most married couples on the first death is limited; the change is felt more acutely on the second death, or where benefits pass directly to children or other beneficiaries.

Reporting and the Personal Representative's Position

From 6 April 2027, personal representatives become responsible for reporting and paying any Inheritance Tax due on unused pension funds and death benefits, a duty that previously did not arise because these benefits fell outside the estate. Because personal representatives will often not know, at the point they need to submit an Inheritance Tax account, exactly what pension death benefits are due to be paid or to whom, Finance Act 2026 introduces new machinery to manage this timing gap. Personal representatives can direct pension scheme administrators to withhold up to 50% of a taxable death benefit for up to 15 months, allowing time for the overall Inheritance Tax position to be established before the balance is released, and a new Pensions Direct Payment Scheme is being introduced to support the practical mechanics of this process between personal representatives and scheme administrators.

The Scale of the Change

The government's own analysis estimates that, in the 2027–28 tax year, around 10,500 estates, roughly 1.5% of total UK deaths, will become liable for Inheritance Tax where they would not previously have been liable at all, purely as a result of this change. A further 38,500 estates that would already have had some Inheritance Tax liability are expected to pay more than they otherwise would have, with an average increase in liability estimated at around £34,000. These are not marginal numbers, and the change is likely to draw many households into Inheritance Tax planning, and potentially into HMRC enquiry, who have never previously needed to consider it.

Practical Planning Points

• Revisit existing wills and expressions of wish in light of the fact that pension death benefits will, from April 2027, form part of the taxable estate rather than sitting outside it, which may change how other assets should be distributed to make best use of the nil-rate band and residence nil-rate band.
• Model the combined effect with the residence nil-rate band taper, since bringing pension funds into the estate can push a previously unaffected estate over the £2 million threshold at which the residence nil-rate band begins to taper away, compounding the direct effect of the change.
• Consider the interaction with lifetime gifting and other Inheritance Tax planning now that pensions no longer sit outside the general framework; the relative attractiveness of drawing down a pension during lifetime, versus other assets, has shifted.
• Personal representatives administering an estate that includes pension death benefits after April 2027 should engage with scheme administrators early, given the new withholding and reporting mechanics, to avoid delay in both the Inheritance Tax account and the eventual distribution of the estate.

Frequently Asked Questions