For two decades a defined contribution pension has been one of the most efficient things to die holding. It sat outside the estate, passed to whoever was nominated, and escaped the 40% that applied to almost everything else. A good deal of retirement planning was built on exactly that.
That ends for deaths on or after 6 April 2027.
The measure has been through consultation and its shape is now settled, including one significant change from what was first proposed. This is what it does, who it does not touch, and the practical problem it creates for the people left behind.
What changes
Most unused pension funds and pension death benefits will be brought within the value of a person's estate for inheritance tax purposes. Once inside, they are taxed like the rest of it: 40% above the available allowances.
The commencement rule is clean. It applies in respect of deaths on or after 6 April 2027. Not the date the pension was built, not the date benefits are paid — the date of death.
What does not change
Three things survive, and the first is the one that matters most to married couples.
The spouse and civil partner exemption is maintained. HMRC states that the existing principles providing exemption for death benefits passing to a surviving spouse or civil partner, and to registered charities, will continue. A pension left to a spouse is exempt, exactly as the rest of an estate left to a spouse is exempt.
So for most couples, nothing happens on the first death. The charge arrives on the second, when everything passes to children — which is the same pattern the rest of inheritance tax already follows, and the reason the nil-rate bands and their transferability matter more from 2027, not less.
Death in service is excluded. Benefits payable from a registered pension scheme on death in service stay outside the charge, as do dependants' scheme pensions from a defined benefit arrangement or a collective money purchase arrangement. If your employer's death in service cover is written through a registered scheme, this measure does not touch it.
Income tax continues to operate alongside. Bringing a pension into the estate does not switch off the income tax treatment of inherited pensions; the legislation provides for schemes and personal representatives to exchange information for both. Where both apply to the same money, the combined effect can be considerably more than 40%, and that is a calculation worth doing rather than assuming.
The liability moved, and it moved onto the executors
The original proposal would have made pension scheme administrators responsible for reporting and paying. After consultation, that changed.
Personal representatives are now liable for reporting and paying any inheritance tax due on unused pension funds and pension death benefits.
This is a heavier burden than it sounds. An executor must now locate every pension the deceased held — including ones the family does not know about, from employments decades ago — and account for them. Anyone who has administered an estate knows that tracing pensions is among the slowest parts of the job.
There is a protection: personal representatives are discharged from liability for pensions discovered after they have received clearance, provided HMRC is satisfied they made every effort to locate the deceased's pensions. "Every effort" is doing real work in that sentence, and keeping evidence of the search will matter.
The 50% withholding, which is the practical problem
Here is the part that will generate the most distress, and it is a cash-flow mechanism rather than a tax one.
Where personal representatives reasonably expect inheritance tax to be due, they can direct pension scheme administrators either to withhold 50% of the taxable benefits for up to 15 months from the date of death, or to pay the inheritance tax to HMRC before releasing the rest.
From the beneficiary's side that means: half the money, and possibly for well over a year.
Fifteen months after a death is a long time for a family that expected a pension to arrive within weeks. It is long enough to matter for a mortgage, for school fees, for the ordinary cost of a household that has just lost an income. Anyone whose plan assumes a pension will reach a child quickly should be looking at that timeline now rather than in 2027.
This is also the sharpest contrast with life insurance. A policy written in trust pays outside the estate, without probate and without this withholding. As pensions move inside the estate, the gap between the two widens — which does not make insurance a substitute for a pension, but does make it a different tool with a different job.
Who is actually affected
The numbers are worth holding onto, because coverage of this change has been considerably more alarming than the scope justifies.
Of around 213,000 estates with inheritable pension wealth in 2027 to 2028:
- about 10,500 will have an inheritance tax liability where previously they would have had none
- about 38,500 will pay more inheritance tax than they otherwise would
That is roughly 23% of estates holding inheritable pension wealth seeing any change at all, and about 5% moving from paying nothing to paying something. The majority are unaffected — most often because everything passes to a spouse, or because the estate sits under the thresholds anyway.
If you are in the affected minority, it is a significant change. If you are not, it is not a reason to restructure a retirement plan that is working.
What to actually check
- Who is nominated on each pension? A spouse keeps the exemption. Children do not.
- Is your death in service cover written through a registered pension scheme? If so it is excluded, and it may be the largest sum involved.
- Would your executors be able to find every pension you hold? Write them down. This is now their legal problem.
- Does anyone depend on a pension arriving quickly? The 50% withholding runs up to 15 months.
- Does the estate rely on allowances a pension would consume? Bringing a pension inside can push an estate over the £2 million taper threshold and cost the residence allowance entirely.
This article explains a measure taking effect on 6 April 2027 and reflects the position as published by HMRC. It is not financial, tax or legal advice. Pension and inheritance tax rules change, detail may be refined before commencement, and the treatment of any particular pension depends on its type and its terms. Take advice from a regulated financial adviser or a chartered tax adviser before restructuring anything.
Sources
- GOV.UK — Inheritance Tax: unused pension funds and death benefits (opens in a new tab)
- GOV.UK — Inheritance Tax on pensions: liability, reporting and payment, summary of responses (opens in a new tab)
- GOV.UK — Technical note: Inheritance Tax on pensions (opens in a new tab)
- GOV.UK — Technical note 2: further information on Inheritance Tax and pensions (opens in a new tab)
- GOV.UK — Reforming Inheritance Tax: unused pension funds and death benefits (opens in a new tab)
This article is general information for a United Kingdom audience. It is not financial, tax or legal advice. The measure described takes effect for deaths on or after 6 April 2027 and detail may be refined before then. The right course for any individual depends on their pension type, their family circumstances and their wider estate. Take advice from a regulated financial adviser or a chartered tax adviser before acting. Last reviewed 14 September 2026.
