Is your pension about to be hit by inheritance tax?

From 6 April 2027, most unused pensions will count towards your estate for inheritance tax – but the £325,000 nil-rate band still applies, anything left to a spouse or civil partner is still exempt, and the government’s own estimate is that this affects around 8%* of estates. If you’ve read a headline about “pension raids” and felt a jolt of concern, take a breath. There’s a genuine, sensible planning conversation to have here. Panic isn’t part of it.

Article takeaways:
• The change applies to deaths on or after 6 April 2027, following Royal Assent of the Finance Act 2026 on 18 March 2026.
• Most unused pension funds and death benefits will be included in your estate for IHT purposes.
• Your first £325,000 remains exempt, and anything passing to a spouse or civil partner is unaffected.
• The bigger issue for some families isn’t just the IHT – it’s the risk of a second tax hit if you die at 75 or older and your beneficiaries then pay income tax on withdrawals too.
• This is a reason to review your plan, not a reason to make a rushed decision.

Why is everyone suddenly talking about pension inheritance tax?

This is a topic we hear about constantly from clients at the moment – not because they’ve fully understood it, but because they’ve heard just enough to worry. That’s understandable. The legislation has emerged in stages over the past couple of years, with detail arriving in drips rather than all at once, and the press coverage has tended to run ahead of the settled facts.

The Sunday Times Money section went so far as to describe the reaction as a “middle-class panic,” and in our experience, that’s not far from what many clients are feeling, even where it doesn’t ultimately apply to them.
Here is the context. The Finance Act 2026 received Royal Assent on 18 March 2026. Contained within it is one of the most significant changes to pension and estate planning in recent years: from 6 April 2027, most unused defined contribution pension funds and death benefits will be brought within the value of an individual’s estate for inheritance tax purposes, regardless of whether the scheme trustees hold discretion over who receives them.

Until now, pensions have generally sat outside the estate for IHT purposes. For many people, that made a pension one of the most tax-efficient ways to pass wealth to the next generation, often more tax-efficient than money held in an ISA or a savings account. From April 2027, that protection is largely removed.

Is your pension about to be hit by inheritance tax?

For most people, no – or not significantly. The government’s own figures suggest this will affect around 8% of estates. Your first £325,000 remains exempt from IHT, and where your estate, including your pension, passes to a spouse or civil partner, it remains IHT-free in full. Death-in-service lump sums are excluded from the changes as well.
Where it does have an impact is for those who have built up a meaningful pension pot alongside other assets – property, savings, investments – that already use up some or all of that nil-rate band, and who intend to leave their pension to children or other beneficiaries rather than a spouse.

The bit that concerns us about IHT is more than the headline figure

The 40% IHT charge isn’t, in our view, the part of this that deserves the most attention. It’s what happens if someone dies at 75 or older.

If a beneficiary inherits a pension after the pension holder passes away at 75 or over, they still pay income tax on withdrawals at their own marginal rate – that isn’t new. What is new from April 2027 is that this income tax will now sit on top of the IHT already charged on the same pot within the estate. Two taxes, one pension – and depending on the beneficiary’s tax position, that combination can take a genuinely significant amount out of what they ultimately receive.
That is the conversation we try to have with clients: not simply “how much IHT will I pay,” but “what is the total tax my family could realistically end up paying on this money, and is there a more efficient way to pass it on?”

So what should you actually do about it?

Nothing drastic, and nothing rushed. We’ve had a small number of clients ask, half-seriously, whether they should simply withdraw their entire pension now to avoid getting caught. We would strongly caution against this. It trades a manageable, plannable tax position for an immediate, and usually much larger, income tax bill – most people would end up worse off, not better.

Our approach with Pension clients starts with the basics and builds outward:

1. Understand where your pension actually sits within your wider plan. Before anything else, you need a clear picture: what the pension is worth, what the rest of the estate is worth, who it’s currently nominated to, and whether that still makes sense under the new rules. This is the step people most often skip, and shouldn’t.

2. Review the investment strategy within your pension itself. With more of the pension likely to form part of a taxable estate, it’s worth revisiting how the fund is invested – whether the current balance of risk and growth potential still matches your goals and timeframe, now that the pension’s role in your overall plan may have changed. As with any investment, the value can go down as well as up and isn’t guaranteed, so you may get back less than you put in – which is exactly why this review matters.

3. Review your expression of wishes. Many people set this up years ago and haven’t looked at it since. It’s worth checking that your nominated beneficiaries, and the balance between them, still reflect your actual wishes – and understanding how your scheme’s expression of wishes interacts with the new rules, since this affects both who receives the pension and how efficiently it can be passed on.

4. Reconsider how you draw down in retirement. Regular drawdown remains a flexible option for many. It is also worth revisiting annuities – current market rates have improved to levels not seen since before the 2008 financial crisis, and for clients seeking a guaranteed income and less exposure to an uncertain future tax position, this is a considerably more attractive conversation than it was five years ago.

5. Look at tax-efficient ways to pass on wealth during your lifetime, not only on death. This is where much of the genuine opportunity lies. Options worth exploring with an adviser include gifting out of surplus regular income (which can be immediately IHT-free where structured correctly), potentially exempt transfers using non-pension assets or tax-free cash, various forms of trust, and business property relief for clients with qualifying business assets – the latter tends to suit older clients in particular.

None of these will suit everyone, and this isn’t a personal recommendation for you specifically – what’s appropriate depends entirely on individual circumstances, family situation, and goals, which is exactly why an adviser needs to assess this with you rather than in a blog post.

A note for larger pensions. Where a pension is worth £1 million or more, we would say this genuinely warrants dedicated attention rather than a general review. At that scale, there is a real and detailed conversation to be had about how to draw down the fund efficiently over a lifetime, balancing income needs, tax position, and what, if anything, is intended to pass on. We specialise in advising clients with pensions of this size, and it’s an area where the right strategy can make a substantial difference to the outcome for both the client and their family.

An illustrative scenario

Consider a married couple, both aged over 75, who have made no lifetime gifts and, between the two of them, have their full nil-rate bands available – including the residence nil-rate band – giving a combined non-taxable estate allowance of £1,000,000. They hold other assets, including their home, worth £1,000,000, and a combined pension pot of £900,000.
Their other assets of £1,000,000 use up the full £1,000,000 non-taxable allowance, with nothing left over. That means the entire £900,000 pension falls into the taxable part of the estate on the death of the second spouse, taxed at 40%: an IHT bill of £360,000 on the pension alone.

That leaves £540,000 of the pension passing to their children. If the children are higher-rate (40%) taxpayers and draw down that inherited pension as income, they pay income tax on those withdrawals too, on top of the IHT already charged, a further £216,000 in this example.

Put together, the combined tax on the £900,000 pension is £576,000 (£360,000 IHT plus £216,000 income tax), leaving £324,000 reaching the family. That’s an effective combined tax rate of 64% on the pension in this scenario – considerably higher than either tax looks on its own, because the two apply one after the other rather than side by side.

We want to stress that this is a simplified, illustrative example only, to show how the two taxes can interact – not a forecast or a calculation for any individual’s actual position.

Real outcomes depend on the specific assets involved, how and when benefits are drawn, each beneficiary’s own tax position at the time, and the rules and rates in force when the money is actually withdrawn, which may differ from those in place today. For a couple in this position, the planning conversation isn’t “how do we avoid this entirely” – it’s “given this is happening, what is the most tax-efficient way to structure income, gifting, and drawdown over the coming years, so our children ultimately receive more of it than in this example.”

It’s not just Pension scaremongering; it’s time to review

We understand why the headlines have landed the way they have.
“Pension raid” makes for a more striking headline than “a modest change affecting a minority of estates, with several established ways to plan around it” – but the second is closer to the truth for most people.

This is a genuine change, and it is worth taking seriously if it applies to you. But the families who tend to navigate this well are not the ones reacting to a headline. They are the ones who take stock of where they actually stand and build a considered plan around it – with time on their side, since 6 April 2027 is still some way off.

Inheritance Tax FAQs

Is my pension about to be hit by inheritance tax?

Not automatically. From 6 April 2027, most unused pension funds are included in your estate for IHT purposes, but your first £325,000 remains exempt, and anything left to a spouse or civil partner is unaffected. The government estimates this will affect around 8% of estates.

When do the pension inheritance tax changes actually start?

The changes apply to deaths on or after 6 April 2027, following the Finance Act 2026 receiving Royal Assent on 18 March 2026. If someone were to pass away before that date, the current rules – where pensions generally sit outside the estate – still apply.

Should I withdraw my whole pension now to avoid the tax?

Generally, this isn’t a sensible move for most people. Withdrawing a large pension in one go usually creates an immediate and often much larger income tax bill than the IHT it’s intended to avoid. It’s worth speaking to an adviser about your specific position before taking any action.

Will my spouse or civil partner have to pay inheritance tax on my pension?

No. Pensions passing to a spouse or civil partner remain exempt from inheritance tax in full, in the same way as the rest of an estate under existing spousal exemption rules.

Is it better to take an annuity or stay in drawdown given these changes?

There is no single right answer – it depends on income needs, health, and attitude to risk, and annuity rates and drawdown flexibility matter differently to different people. Annuity rates have become notably more competitive recently, which is worth factoring in, but this is a decision best made with an adviser rather than in isolation.