For many years, pensions have occupied a slightly unusual place in estate planning. While a home, savings and investments are normally counted when working out the value of an estate, many unused pension funds have been able to pass to beneficiaries outside it.

That has made pensions valuable for more than retirement income. Depending on the type of scheme and the member’s circumstances, money left in a pension could often be passed to a spouse, partner, child or another chosen beneficiary without being included in the Inheritance Tax calculation.

From 6 April 2027, that position will change. Most unused pension funds and pension death benefits will be brought into the value of the estate for Inheritance Tax purposes.

This is a significant change, but it does not mean every pension will be taxed, nor that 40% will automatically be taken from the whole fund. What happens will depend on the type of pension, who receives it, the value of the wider estate and the allowances or exemptions available.

What can happen to a pension under the current rules?

The answer depends partly on the kind of pension involved.

A defined contribution pension is built from contributions and investment returns. If money remains in the pension when the member dies, the scheme may be able to pay it to one or more beneficiaries as a lump sum, inherited drawdown fund or income. The options available depend on the provider and scheme rules.

A defined benefit pension, sometimes called a final salary pension, usually works differently. It promises an income based on the scheme’s formula rather than leaving an individual investment pot. Following the member’s death, it may provide an income to a surviving spouse, civil partner or dependant, or a lump sum in certain circumstances.

If pension savings have already been exchanged for an annuity, the payments may stop on death. However, a joint-life annuity, guarantee period or value-protection option could provide continuing payments or a lump sum. The choices made when the annuity was purchased are important.

The State Pension will normally stop when the recipient dies. In some situations, a surviving spouse or civil partner may be able to inherit an additional amount, but this depends on both people’s National Insurance records and when they reached State Pension age.

Because schemes differ, the starting point should always be the individual pension’s rules rather than an assumption that every pension can be inherited in the same way.

What is changing from 6 April 2027?

The new rules apply when a pension scheme member dies on or after 6 April 2027. It is the date of death that matters. If someone dies before that date, the present rules will apply even if the pension benefit is paid later.

For deaths on or after the change, most unused pension funds and pension death benefits will be treated as part of the deceased person’s estate when calculating Inheritance Tax. This includes many defined contribution pension pots that would currently sit outside the estate because the pension trustees or provider have discretion over the beneficiary.

The legislation refers to this pension value as “notional pension property”. In practical terms, the deceased person’s personal representatives—usually the executors named in the Will—will need to identify the pension schemes, obtain date-of-death values and include the relevant amounts when establishing the estate’s Inheritance Tax position.

Some benefits will remain outside the new charge. These include qualifying dependants’ scheme pensions and death-in-service benefits payable from registered pension schemes. Scheme rules and the precise form of benefit will still need to be checked.

Will the whole pension face Inheritance Tax at 40%?

No. The pension will be added to the wider estate before the available exemptions and tax-free thresholds are considered. Inheritance Tax is normally charged at 40% only on the taxable value above the available thresholds, not on every pound in the estate.

The standard nil-rate band is currently £325,000. A residence nil-rate band of up to £175,000 may also be available when a qualifying home is left to direct descendants. Unused allowances can sometimes transfer between spouses and civil partners, meaning a qualifying estate may potentially pass on as much as £1 million before Inheritance Tax becomes due.

These figures are not an automatic £1 million allowance for everybody. The residence nil-rate band has conditions, can be limited by the value of the qualifying home and begins to taper for estates worth more than £2 million. Earlier gifts and trust arrangements can also affect the calculation.

Consider a simplified example. Someone dies after 6 April 2027 leaving a qualifying home and savings worth £300,000, together with an unused defined contribution pension of £250,000. The estate considered for Inheritance Tax could now be £550,000 rather than £300,000.

If the full £325,000 nil-rate band and £175,000 residence nil-rate band were available, £50,000 would remain taxable. At 40%, the resulting Inheritance Tax would be £20,000—not 40% of the £250,000 pension. The actual result could be very different if the home did not qualify, lifetime gifts had used part of an allowance or other exemptions applied.

Transfers to a spouse or civil partner will normally remain exempt from Inheritance Tax. An unmarried partner does not receive the same automatic spouse exemption, however, regardless of how long the couple have lived together. That difference could become increasingly important once unused pensions are included in the estate.

Inheritance Tax and Income Tax are separate questions

The new Inheritance Tax treatment does not remove the existing Income Tax rules for inherited pensions.

Where the member dies before age 75, defined contribution death benefits can usually be paid without Income Tax, provided the relevant conditions are met. Lump sums may need to be paid within two years and are subject to the deceased member’s available lump sum and death benefit allowance.

If the member dies aged 75 or over, pension benefits paid to an individual beneficiary will normally be taxed as that person draws them, using the beneficiary’s own marginal rate of Income Tax. A large lump-sum withdrawal could therefore produce a different tax result from taking the inherited pension gradually.

Some defined benefit income, including qualifying dependants’ scheme pensions, is taxed as the recipient’s income regardless of the member’s age at death.

From April 2027, an inherited pension could therefore be relevant to both the estate’s Inheritance Tax calculation and the beneficiary’s Income Tax position. The legislation includes measures intended to prevent Income Tax being charged on the part of a pension benefit used to pay the pension’s Inheritance Tax liability. HMRC is due to publish further practical guidance before implementation.

Who will report and pay any tax?

The personal representatives will be responsible for reporting and paying any Inheritance Tax due on unused pension funds and death benefits. Pension providers will supply valuations and information about exempt and non-exempt beneficiaries.

Once trustees have decided who should receive a discretionary pension benefit, that beneficiary can also become jointly liable for the Inheritance Tax attributable to their entitlement.

There may be occasions when the estate does not contain enough accessible cash to pay the tax before probate. The new process will allow a personal representative to ask a registered pension scheme to withhold up to 50% of an unpaid beneficiary’s pension entitlement for a limited period. A beneficiary or personal representative may also be able to direct the pension scheme to pay the pension-related Inheritance Tax directly to HMRC.

These arrangements are designed to help with cash flow, but dealing with several pension providers could still add time and administration. Keeping an accurate record of every pension could make an executor’s job considerably easier.

Does a pension nomination still matter?

Yes. Including a pension in the Inheritance Tax calculation does not necessarily mean that it will be distributed under the Will.

Many pension schemes will continue to use trustee or provider discretion when selecting beneficiaries. An expression-of-wish or nomination form tells the scheme who the member would like to benefit. It is not always legally binding, but it is an important part of the trustees’ decision.

Problems can arise when a nomination was completed many years ago and no longer reflects the member’s life. A former partner may still be named, a new spouse might be missing or children and grandchildren may not have been considered.

Reviewing nominations following marriage, divorce, separation, bereavement or a change in family circumstances remains worthwhile. A Will and pension nomination should also be considered together, even though they perform different jobs.

Should you change the way you use your pension?

The change may affect retirement and estate planning, but it should not lead to rushed withdrawals.

A pension’s main purpose is to provide an income in retirement. Taking more money simply to reduce the amount left in the pension could create an Income Tax bill, reduce future financial security and move cash into bank accounts or investments that are already part of the estate.

Giving withdrawn money away is not automatically an answer either. Different gifting rules apply, including the seven-year rule and exemptions for certain regular gifts made from surplus income. Affordability must come first; giving away too much could leave insufficient money for later-life spending or care.

For some families, the new rules may change the order in which pensions, ISAs and other investments are used. For others, existing spouse exemptions and available allowances may mean that little needs to change. Life insurance written in an appropriate trust could sometimes help provide money towards a future tax bill, although the cover, affordability and trust arrangement all require careful consideration.

The right response comes from modelling the whole position rather than treating the pension in isolation.

What can you do before April 2027?

There is still time to understand how the reform may affect your family. A useful review could include:

• Listing every workplace and personal pension, including older or forgotten schemes.
• Checking whether each arrangement is defined contribution, defined benefit or an annuity.
• Requesting current values and details of the benefits payable on death.
• Updating expression-of-wish or beneficiary nomination forms.
• Reviewing your Will and confirming who your executors are.
• Estimating the value of your home, savings, investments, pensions and other assets together.
• Considering how a future Inheritance Tax bill could be funded without disrupting the people you wish to protect.
• Taking coordinated financial, tax and legal advice before making significant changes.

If you are already reviewing your retirement, our guide to the five-year retirement countdown can help you consider your income, spending, pensions and wider plans together. Those assessing whether their savings are likely to support the life they want may also find our article on retiring with a £500,000 pension pot useful.

Bringing pension and estate planning together

The 2027 reform changes a long-standing assumption that pensions normally sit outside the estate for Inheritance Tax. For some families, adding unused pension wealth could bring the estate over an important threshold or increase an existing liability.

For many others, no Inheritance Tax will be due. The pension may pass to an exempt spouse or civil partner, or the estate may remain within its available allowances. Either way, understanding the figures before the rules take effect can remove uncertainty and reduce the risk of leaving executors with an unexpected problem.

Westfield Financial Solutions can help you consider how pensions, protection and your wider financial arrangements fit together. Where pension, investment or retirement advice is required, Westfield refers clients to Lakeside FS Ltd.

To discuss your broader financial planning, call the Gomersal office on 01274 036 888, the Skipton office on 01756 540 541, or email info@westfieldfs.co.uk.

Important information: This article is provided for general information only and does not constitute pension, investment, tax or legal advice. It reflects legislation and published guidance available in September 2026. Tax treatment depends on individual circumstances and may change. The value of investments can fall as well as rise, and you may get back less than you invest.

Follow us