Pension Inheritance Tax: Unused Pension Funds and Death Benefits

Pension inheritance tax rules are undergoing a significant change. During 2026/27, most unused funds held within discretionary pension schemes generally remain outside a person’s estate for Inheritance Tax (IHT). However, for deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of the deceased person’s estate for IHT purposes.

This change makes pension and estate planning increasingly important for pension holders, beneficiaries and personal representatives. It is also important to distinguish inheritance tax on pensions from the separate Income Tax rules that can apply when beneficiaries receive pension death benefits. Ultimate personal tax guidance for personal tax can help beneficiaries understand how pension income fits alongside their other taxable income and allowances.

How Does Pension Inheritance Tax Work in 2026/27?

For deaths before 6 April 2027, most discretionary pension schemes continue to benefit from the existing IHT treatment. Where the pension scheme administrator or trustees have discretion over who receives the death benefits, unused pension funds are generally outside the deceased member’s estate for IHT purposes.

This is one reason pensions have historically been treated differently from assets such as property, savings and investments held personally.

However, not every pension death benefit is automatically outside the estate. The precise treatment depends on the pension scheme and the nature of the benefits. Pension holders should therefore check their scheme documentation rather than assuming that all pension wealth is exempt from IHT.

Inheritance Tax on Unused Pension Funds from April 2027

A major change applies to deaths occurring on or after 6 April 2027. From that date, most Inheritance Tax on unused pension funds will be determined by including those pension funds and relevant death benefits within the value of the deceased person’s estate. Our guidance on unused pension funds and IHT from April 2027 explains how this forthcoming change affects pension wealth and the wider estate calculation.

The new rules remove much of the existing distinction between discretionary and non-discretionary pension arrangements for IHT purposes.

In practical terms, the value of relevant unused pension funds will be considered alongside other estate assets, including:

• Property and land.
• Cash and savings.
• Shares and investments.
• Business interests.
• Other assets within the deceased’s estate.

Whether additional IHT is actually payable will depend on the overall value of the estate and the exemptions, reliefs and nil-rate bands available.

Which Pension Benefits Will Be Affected?

The April 2027 reforms are intended to bring most unused pension funds and pension death benefits into the IHT calculation.

The rules can affect benefits associated with both defined contribution and defined benefit arrangements, although the precise treatment depends on the type of benefit payable following death.

Importantly, death-in-service benefits payable from registered pension schemes will remain outside the scope of these new IHT rules. Certain dependant’s scheme pensions from defined benefit arrangements and collective money purchase arrangements are also excluded.

Pension holders should therefore avoid assuming that every pension-related payment will receive identical IHT treatment after April 2027.

Who Will Be Responsible for Reporting Pension IHT?

For deaths on or after 6 April 2027, the deceased person’s personal representatives will be responsible for reporting and paying any Inheritance Tax due in relation to relevant unused pension funds and death benefits.

This makes communication between executors and pension scheme administrators particularly important. Personal representatives will need information about the deceased’s pension arrangements to establish the value that needs to be included in the estate’s IHT calculation. The wider tax responsibilities for executors in London should also be considered, as personal representatives may need to deal with Income Tax, Capital Gains Tax and other estate reporting obligations.

The new framework also provides mechanisms intended to help personal representatives where the estate does not have enough readily available funds to settle the IHT attributable to pension benefits.

Income Tax on Pension Death Benefits

IHT on death benefits should not be confused with Income Tax on inherited pension benefits. The two taxes operate separately.

Whether a beneficiary pays Income Tax generally depends on factors including the type of pension benefit received and the pension member’s age at death.

What Happens if the Pension Holder Dies Before Age 75?

Where the pension holder dies before age 75, many qualifying pension death benefits can currently be paid without Income Tax, provided the relevant conditions are satisfied.

For lump sum death benefits, the deceased member’s available Lump Sum and Death Benefit Allowance may also need to be considered. The standard allowance for 2026/27 is £1,073,100, although an individual may have a different available amount because of previous pension benefits or protections.

If qualifying lump sum death benefits exceed the deceased member’s available allowance, the excess can be subject to Income Tax in the hands of the recipient.

Timing can also matter. Certain lump sums paid more than two years after the pension provider is notified of the death can become taxable.

What Happens if the Pension Holder Dies at 75 or Older?

Where the pension holder dies aged 75 or over, pension benefits received by an individual beneficiary are generally subject to Income Tax at the recipient’s applicable marginal rate. Understanding the tax on inherited private pensions can help beneficiaries assess how withdrawals may affect their personal Income Tax position.

This can apply to both lump sums and withdrawals from inherited drawdown arrangements.

For example, if a beneficiary receives taxable pension income while already paying higher-rate Income Tax, the pension withdrawal can increase the amount of income falling within the higher-rate band.

The beneficiary should therefore consider the Income Tax consequences before deciding how and when to access inherited pension funds where withdrawal flexibility is available.

Could Both Inheritance Tax and Income Tax Apply After April 2027?

Potentially, yes. This is one of the most important consequences of the new pension inheritance tax regime.

From 6 April 2027, relevant unused pension wealth may be included when calculating the deceased person’s estate for IHT. Separately, a beneficiary receiving taxable pension benefits may also face Income Tax depending on the applicable pension death benefit rules.

This does not mean every inherited pension will automatically suffer both taxes. The actual outcome will depend on factors including:

• The total value of the deceased person’s estate.
• Available IHT exemptions and nil-rate bands.
• The type of pension and death benefit.
• The pension holder’s age at death.
• The identity and tax position of the beneficiary.
• How and when pension benefits are paid.

This interaction is an important consideration for estate planning ahead of April 2027.

Do Pension Beneficiary Nominations Still Matter?

Yes. Pension holders should continue to review any expression-of-wish or beneficiary nomination held by their pension provider.

The April 2027 changes alter the IHT treatment of many pension death benefits, but they do not make beneficiary nominations irrelevant. Scheme rules and trustee or administrator discretion can still affect who ultimately receives pension benefits. Separately, understanding the requirements for a valid will in London is important for assets that pass through the deceased’s estate rather than under the pension scheme’s own death-benefit arrangements.

A pension nomination should therefore be reviewed following major changes such as marriage, divorce, the death of a nominated beneficiary or significant changes to family circumstances.

What Should Pension Holders Review Before April 2027?

The forthcoming inheritance tax on pensions changes should be considered as part of the individual’s overall estate position rather than in isolation.

A practical review should include:

• Identifying all pension arrangements and obtaining current valuations.
• Checking beneficiary nominations and expression-of-wish forms.
• Estimating the value of the estate both with and without pension wealth.
• Reviewing available IHT nil-rate bands, exemptions and reliefs.
• Considering how pension death benefits interact with the individual’s will and wider estate plan. In some circumstances, beneficiaries may also consider changing a will after death where the original distribution of estate assets no longer reflects the family’s intended outcome.
• Understanding the potential Income Tax position of beneficiaries.

Decisions about pension withdrawals should not be made solely to reduce a future IHT bill. Drawing pension funds can create Income Tax consequences and may move money from a tax-advantaged pension environment into the individual’s personal estate.

Why the April 2027 Pension IHT Change Matters

The treatment of pensions has historically allowed many unused discretionary pension funds to pass outside the estate for IHT. That position changes significantly for deaths from 6 April 2027.

For individuals with substantial pension savings, including pension wealth in the estate could increase the value exposed to IHT. It may also affect how other estate planning arrangements work and how much ultimately passes to beneficiaries.

The change is particularly relevant where pension wealth represents a substantial proportion of total family assets or where the estate is already close to the available IHT thresholds. For employees and executives whose wealth also includes substantial equity awards, estate planning for RSUs in London can help ensure vested company shares are considered alongside pensions and other estate assets.

Planning for Pension Inheritance Tax

Pension inheritance tax planning now requires consideration of two different periods. For deaths during 2026/27, the existing IHT rules generally continue to apply. For deaths on or after 6 April 2027, most unused pension funds and relevant pension death benefits will be brought into the deceased person’s estate for IHT purposes.

At the same time, beneficiaries must continue to consider the separate Income Tax rules applying to inherited pension benefits, particularly the member’s age at death and the type and timing of the payment.

Reviewing pension values, beneficiary nominations and the wider estate before the new rules take effect can help identify potential exposure and ensure that pension arrangements remain consistent with the individual’s wider succession objectives.

Disclaimer: This article provides general information on UK pension and Inheritance Tax rules. Pension death benefit taxation depends on the pension arrangement, age at death, available allowances, beneficiary circumstances and date of death. The new IHT treatment applies to deaths on or after 6 April 2027.

Case Study: Reviewing Pension Wealth Before the April 2027 IHT Changes

Robert approached our Wimbledon office because a substantial proportion of his wealth was held within a defined contribution pension. He had previously understood that his unused pension could generally pass outside his estate for Inheritance Tax, but was concerned about how the rules applying from 6 April 2027 could affect what his family eventually received.

Cigma Accounting reviewed Robert’s pension alongside his property, savings and investments to estimate his overall estate position. We explained that while most unused funds in discretionary pension arrangements generally remain outside the estate under the existing 2026/27 rules, most relevant unused pension funds and death benefits will be brought into the IHT calculation for deaths on or after 6 April 2027.

Rather than looking at the pension separately, we modelled how including its value could affect Robert’s potential IHT exposure after taking account of the available nil-rate bands and other relevant estate assets. We also reviewed his existing beneficiary nominations to ensure they remained consistent with his wider succession intentions.

Our review considered the separate Income Tax treatment of pension death benefits as well. We explained that IHT and beneficiary Income Tax are different calculations, and that factors such as Robert’s age at death, the type of benefit and the beneficiary’s own tax position could affect the eventual outcome.

As part of the wider work, Cigma Accounting considered Robert’s personal tax, pension taxation, Inheritance Tax and estate planning position. This helped him understand the potential consequences of the April 2027 reform without making pension withdrawals solely for IHT reasons and potentially creating unnecessary Income Tax or moving funds into his personal estate.

Robert was left with a clearer picture of how his pension could affect his future estate, which nominations and records should be reviewed, and where further planning may be appropriate before the new rules take effect.