Why Pensions Are Losing Their Inheritance Tax Advantage From April 2027

For years, pensions have been one of the most effective tools for passing on wealth free of Inheritance Tax - a reason many advisers suggested spending other assets first and leaving pensions untouched. That changes fundamentally from April 2027.

The old advantage

Historically, most unused defined contribution pension funds sat entirely outside the value of an estate for Inheritance Tax purposes, regardless of size. This made pensions uniquely attractive for estate planning - money could be left invested and passed on to beneficiaries completely free of the 40% IHT rate that would apply to almost any other asset of equivalent value.

What’s changing from 6 April 2027

Under the Finance Act 2026 (which received Royal Assent on 18 March 2026, following the Autumn Budget 2024 announcement), most unused pension funds and pension death benefits will be brought into the value of the estate for Inheritance Tax purposes for deaths on or after 6 April 2027. Death-in-service benefits and dependants’ scheme pensions are excluded, and the personal representatives (usually the executors), not the pension scheme, are responsible for reporting and paying any IHT due. Death benefits paid to a spouse or civil partner remain exempt, consistent with the treatment of other assets passing between spouses, but payments to children, grandchildren, or others will now generally count toward the taxable estate.

Why this reverses decades of common estate planning advice

‘Spend your ISA, preserve your pension’ has been a standard piece of retirement drawdown advice for years, precisely because of the old IHT treatment (see our dedicated ISA vs Pension flexibility article in the Pensions series). From April 2027, this advantage disappears for most savers, meaning the calculation of which pot to draw down first, and which to preserve for beneficiaries, needs a genuine rethink rather than following old assumptions.

Who’s affected

This change is most significant for people with substantial unused pension pots at death, who had been specifically planning to leave them to non-spouse beneficiaries such as children - and who should also think about how any resulting IHT bill would actually be paid, since pensions don’t automatically come with the same 10-year instalment option available for land, property, or business assets (see our dedicated article on ways an Inheritance Tax bill can be funded). For people who expect to draw down their pension in full during their own lifetime, the change is less relevant, since there’s little or nothing left to be included in the estate calculation at death.

How this interacts with the two-tier tax treatment on death

The Income Tax treatment of pension death benefits (tax-free if the pension holder died before 75, taxable at the beneficiary’s marginal rate if 75 or over - see our dedicated Pensions series article on inheriting a pension) remains alongside this new IHT change, not instead of it. This means a pension inherited from someone who died at 76, for example, could potentially face both Inheritance Tax (on the pension’s value, at the estate level) and Income Tax (on withdrawals, at the beneficiary’s marginal rate) - a combined tax burden that didn’t previously apply to pensions in this way. To limit double taxation, Income Tax isn’t charged on the portion of the death benefits equivalent to the IHT due on the pension, though beneficiaries may need to reclaim overpaid Income Tax from HMRC if the IHT isn’t paid directly from the scheme.

What to consider before April 2027

• Review your overall estate plan with this specific change in mind, rather than assuming your pension will pass to beneficiaries exactly as it has in the past.
• Reconsider drawdown ordering in retirement - the previous logic of preserving pensions and spending other assets first may no longer be the most tax-efficient approach for your specific situation.
• Check your pension death benefit nominations are up to date, since who receives the pension, and its relationship to you, still affects the specific tax treatment even after this change.
• Get professional advice if you have a substantial pension pot you were specifically planning as an inheritance vehicle, since the change is significant enough to warrant a considered review rather than assuming nothing needs to change.

The bottom line

From April 2027, pensions lose a genuinely significant estate-planning advantage they’ve held for years. Anyone with substantial pension savings who had been planning around the old rules should review their overall estate and drawdown strategy well before the change takes effect, rather than assuming the old assumptions still hold.