Will my pension be subject to Inheritance Tax? What you should know and do before 6 April 2027.
For many years, pensions have played an important role in estate planning. This is because many pension schemes operate on a discretionary basis, allowing for most unused pension funds and pension death benefits to pass outside of a deceased person’s estate for Inheritance Tax (IHT) purposes, thereby enabling people to pass on such assets to their nominated beneficiaries without IHT consequences.
However, that favourable position is changing.
As part of the Autumn 2025 Budget, the government announced that, from 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased person’s estate for IHT purposes. This significant change may result in some estates facing a larger IHT liability and may even bring some estates that would not otherwise have been taxable within the IHT net.
Pension scheme members who die before 6 April 2027 will not be subject to these new rules, even if benefits are paid after that date.
What is changing?
Section 66 of the Finance Act 2026 introduces a new Section 150A(1) to the Inheritance Tax Act 1984, which stipulates that ‘notional pension property’ will now form part of an individual’s estate for IHT purposes.
This includes property held under:
- a registered pension scheme;
- a qualifying non-UK pension scheme; and
- a Section 615(3) scheme.
Crucially, these reforms will apply irrespective of whether pension trustees or administrators have discretionary powers over who should receive the relevant benefits.
As a result of the reforms, many forms of unused pension funds and death benefits that previously passed free of IHT will, from 6 April 2027, be brought within the IHT regime.
Why does this matter?
For many people, pensions are one of their most valuable assets, particularly if they have not needed to draw down on them heavily during retirement. With certain pensions now becoming subject to IHT, estates may swell in size, with ensuing repercussions from an IHT perspective. Estate plans that once appeared tax-efficient may no longer produce the intended result.
With IHT being charged at a rate of 40%, the inclusion of pension assets could have a substantial impact on the amount that your beneficiaries ultimately receive on your death.
If passing assets to your chosen beneficiaries as tax-efficiently as possible is important to you, it is advisable to review your pension nominations, Will, and wider estate planning arrangements before the new rules take effect.
Will all pension benefits be taxable?
In short, no.
Certain death benefits are expressly excluded from the value of an individual’s estate for IHT purposes, including death-in-service benefits, some dependants’ pensions, and certain joint life annuities.
In addition to this, there are some IHT exemptions that will apply to transfers of pension benefits. For example, ‘notional pension property’ that passes to a surviving spouse or civil partner on a pension member’s death will pass free of IHT. Likewise, ‘notional pension property’ passing to a charity will also pass without IHT consequences.
Accordingly, there are still some ways to structure leaving pension wealth tax-efficiently as part of your wider estate planning. However, the rules are detailed, and further practical guidance is expected before 6 April 2027.
What should you do before 6 April 2027?
- Review your Will
Your Will remains the foundation of your estate plan. It sets out how your estate should be distributed after your death and, when drafted carefully, can help ensure that your wishes are carried out in the most tax-efficient way possible.
Although your Will will not usually determine who receives your unused pension benefits, the forthcoming changes mean that the value of those benefits may now be taken into account when calculating the IHT payable on your estate. As a result, Wills prepared before these reforms were announced may no longer achieve the intended tax outcome.
Reviewing your Will alongside your pension arrangements can help establish whether your existing estate plan remains appropriate in light of the new rules. Depending on your circumstances, it may be advisable to update your Will to ensure your arrangements continue to reflect your wishes and make the best use of any available reliefs and exemptions.
2. Review your pension nominations
In most cases, it is not your Will that determines who receives your unused pension funds or pension death benefits. Instead, pension trustees or administrators will usually consider your ‘expression of wish’ or ‘nomination form’ when deciding who should benefit.
It is therefore essential that you review your pension nominations alongside your Will.
Outdated nominations can create unintended consequences if they no longer align with the estate plan established by your Will. This may affect who ultimately benefits, the IHT position, and whether your wishes are carried out as expected.
3. Review your estate’s IHT position and consider estate planning
It is worth calculating the approximate value of your taxable estate in light of these reforms. This can help you to understand whether the changes are likely to have a material impact on your IHT position, after applying any applicable reliefs and exemptions.
If they do, you may wish to consider wider estate planning options to potentially mitigate your estate’s IHT liability. Depending on your circumstances, assets, and goals, this could include lifetime gifting, the implementation of trusts, and life insurance policies (to name just a few).
4. Keep clear pension records
The reforms will also place greater responsibility on personal representatives (those responsible for administering an estate, either as an executor under a Will or an administrator where there was no Will).
Personal representatives will need to identify pension schemes, obtain valuations, and liaise with pension administrators when administering the estate. This could add complexity and delay to the administration.
Keeping a clear record of your pension arrangements will assist your personal representatives with this when the time comes.
These changes to the IHT treatment of pensions could have a significant impact on your estate. Taking advice now can help ensure that your estate plan remains tax-efficient, practical, and aligned with your wishes.
If you need assistance reviewing your estate’s IHT position alongside your Will and estate planning options, our Private Client team would be pleased to help.
Disclaimer: General Information Provided Only
Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.
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