Pensions and inheritance tax from 6 April 2027

Until now, most money left in a pension when you die has passed to your family outside your estate, so no inheritance tax was due on it.

From 6 April 2027, most unused pension funds and death benefits will be added to the value of your estate. That means a pension could push your estate above the tax-free allowances — or add to a bill you already expected — with 40% tax due on the value above those allowances.

• Death-in-service benefits paid by a registered pension scheme.
• Dependants' scheme pensions and joint-life annuities that keep paying a partner or dependant.
• Anything left to your husband, wife or civil partner, which remains free of inheritance tax.
• Gifts to charity.

Anyone whose home, savings, investments and pensions together come to more than the allowances available to them:

• £325,000 nil-rate band per person.
• £175,000 residence nil-rate band when your home passes to children or grandchildren.
• Unused allowances can pass to a surviving spouse or civil partner — up to £1 million for a couple.

Because pensions will count towards your estate, they will also count when working out whether your estate is over £2 million. Above that level the residence nil-rate band is reduced by £1 for every £2, so a large pension can cost you some or all of that allowance.

If you die before 75, your family can usually take an inherited pension free of income tax. If you die at 75 or over, they pay income tax at their own rate on whatever they draw out.

From April 2027 that income tax comes after any inheritance tax. For someone paying the 45% additional rate, that could mean 40% inheritance tax and then 45% income tax on the remaining 60% — a combined rate of up to 67%.

Executors (personal representatives) will be responsible for including pensions when they work out and report any inheritance tax due. In practice that means tracking down every pension, getting a value from each scheme and working with the schemes on paying the tax. In some cases they can ask a pension scheme to pay the tax directly from the pension.

Keeping an up-to-date list of your pensions and where they are held makes that job far easier for the people you leave behind.

• List every pension you have, with the provider and an up-to-date value.
• Check your nomination forms (sometimes called "expression of wish" forms) so each scheme knows who you want to benefit.
• Look at how your estate is split between you and your partner, and how allowances could pass between you.
• Consider gifts: the £3,000 annual exemption, regular gifts from surplus income, and larger gifts that fall outside your estate after 7 years.
• Consider life insurance written in trust to help your family pay any bill.
• Get advice before taking large sums out of a pension. Withdrawals can create an income tax bill now, and the money may still be part of your estate.