For more than a decade, a defined contribution pension has been the one large asset most people could leave to their family without inheritance tax. Because most schemes pay death benefits at the trustees' discretion, the pot sat outside the estate. That is why the standard approach for anyone with other savings has been to spend those first and leave the pension until last.

From 6 April 2027 that changes. The Finance Act 2026, which received Royal Assent this year, brings most unused pension funds and death benefits into the inheritance tax estate. This guide explains what is caught, what is not, who has to pay and report the tax, and how the change interacts with the income tax rules that already apply when someone dies after 75. The figures are for the 2026/27 tax year and the legislation as passed.

What the law now says

Sections 66 to 71 of the Finance Act 2026 insert a new section 150A into the Inheritance Tax Act 1984. From 6 April 2027, a member of a registered pension scheme is treated as owning their unused pension funds and death benefits immediately before death, so the value is added to their estate for inheritance tax. It applies to deaths on or after that date, and it applies whether or not the scheme trustees have discretion over who receives the money. The discretion that kept pensions out of the estate no longer does so.

For a money purchase pension, the value is what is in the pot, whether or not the member has started drawing from it. For a defined benefit scheme, it is any lump sum death benefit that the scheme must or could reasonably pay.

What stays outside the estate

The legislation excludes some benefits, and HMRC's technical note sets them out plainly:

  • Death in service benefits, where the payment depends on the member being in employment at death, from both discretionary and non-discretionary schemes.
  • Dependants' scheme pensions from a defined benefit or collective money purchase scheme: the ongoing income a widow, widower or dependent child receives.
  • A dependant's or nominee's annuity bought together with the member's own lifetime annuity, and any trivial commutation of a dependant's pension.
  • Charity lump sums, where a money purchase scheme pays the pot to a registered charity because there are no dependants.

The existing exemptions also carry over. Anything passing to a surviving spouse or civil partner is exempt, as it is for the rest of the estate, and so is anything left to charity. For a married couple, the practical effect is that the tax usually arrives on the second death, when the combined pension wealth passes to the children.

The tax itself

Nothing changes in the rates. The pension value is added to everything else the person owned and the total above the available allowances is taxed at 40%, or 36% where at least 10% of the net estate goes to charity. The nil rate band is £325,000 and the residence nil rate band, for a home passing to direct descendants, is £175,000. Both are fixed until 5 April 2031 under section 72 of the same Act, and the residence band is withdrawn by £1 for every £2 that an estate exceeds £2 million. A pension that used to sit outside that arithmetic now counts towards the £2 million, which is how a modest-looking pension can also cost a family part of their residence allowance.

HMRC's own estimate is that around 213,000 estates will have inheritable pension wealth in 2027/28. Of those, about 10,500 will pay inheritance tax that would not have paid any before, and about 38,500 will pay more than they would have. The average increase for an affected estate is put at around £34,000. The measure is forecast to raise £1.485 billion in 2028/29.

Who pays, and how it is reported

This is the part that has changed most since the original 2024 consultation, which had proposed making pension schemes responsible. The final position in section 67 is that the deceased's personal representatives (the executors, or administrators where there is no will) are liable for reporting and paying the tax on the pension, just as they are for the rest of the estate. Scheme trustees are expressly not liable. A scheme administrator only becomes liable if it pays out in breach of a withholding notice or fails to pay tax it has been directed to pay.

To make that workable, the Act gives personal representatives two tools:

  • A withholding notice. Where the personal representatives know or have reason to believe that inheritance tax may be due, they can direct the scheme to hold back up to 50% of the taxable benefits for up to 15 months after the end of the month of death, so the money is still there when the tax is calculated.
  • A direct payment request. The personal representatives, or the beneficiary once the benefits are theirs, can direct the scheme to pay the inheritance tax to HMRC straight from the pension, and the scheme has 35 days to do so. Under the existing income tax rules, the tax paid this way reduces the benefit the beneficiary receives.

Once benefits have been paid out, the beneficiaries who received them become jointly and severally liable with the personal representatives for the tax on their share.

The timetable is tight. Personal representatives are expected to contact every scheme within 28 days of death, and the scheme must return a valuation and the split between beneficiaries within 28 days of the request, or 14 days after it decides who the beneficiaries are, whichever is later. All of this has to happen before probate, because from April 2027 the full value of the estate, including pensions, must be reported and the tax paid before the grant is issued. Schemes must also tell HMRC within three months of making a final payment. The practical message for anyone who may be an executor is to keep a list of every pension the person holds, because tracing them after death now sits on the critical path.

Income tax on death benefits still applies

Inheritance tax is a new layer on top of the existing income tax rules, which are unchanged.

If the member dies before 75, most lump sums and drawdown income paid to beneficiaries are free of income tax, provided the lump sums are within the member's lump sum and death benefit allowance of £1,073,100 and the funds are designated within two years of the scheme being told of the death. Lump sums above the allowance, or paid late, are taxed as the beneficiary's income.

If the member dies at 75 or over, everything the beneficiary draws is taxed as their income at their own marginal rate.

From April 2027 the two taxes stack. Take an estate that is already above its allowances, where a parent dies at 78 leaving a £400,000 pension to a daughter who is a higher-rate taxpayer. Inheritance tax of £160,000 is paid first, leaving £240,000 in the pension. As she draws it, income tax at 40% takes a further £96,000, leaving her £144,000. That is an effective rate of 64% on the pension, and it would be 67% for an additional-rate taxpayer. The same pension left to a surviving spouse first would pay no inheritance tax on the first death, which is one reason nomination forms are being looked at again.

What this means for planning

The old rule of thumb, spend the pension last, no longer holds automatically. Whether to draw more from the pension in life and preserve ISAs or other assets instead depends on age, the size of the estate, marginal income tax rates now and after death, and who the beneficiaries are. Some families will find gifting from pension income, which can qualify as normal expenditure out of income and leave the estate immediately, more useful than it was. Others with several old pots will want them on one page before 2027, if only so an executor can find them: the pension consolidation guide covers when combining pensions helps and when it costs a guarantee.

For estates already near or above the thresholds, the pension now belongs in the same conversation as the home, the investments and the will. The inheritance tax on estates over £1 million guide sets out the reliefs and exemptions that apply across the whole estate.

None of this is a reason to act in a hurry, and some of it is a reason to review an expression of wishes form that has not been looked at in years. Working through the order of drawing, the nominations and the interaction with income tax is what an independent financial adviser does with the actual numbers. If you would like to be introduced to a vetted, whole-of-market independent adviser, tell us what you need and our team will personally make the introduction, free and without obligation.