Managing your wealth for those you will leave behind when you die is a challenging process—both emotionally and financially. Unfortunately, the complex tax laws surrounding inheritance can make this aspect of estate management even more demanding. And now, with the recent introduction of new laws governing inheritance tax on pensions, this sensitive part of later life just became even more difficult to navigate.
As of April 2027, the UK government will begin considering a person’s private pension pot as part of their ‘inheritable pension wealth’, or estate. Whilst most UK taxpayers will not be affected by these changes, those with considerable private pensions and/or sizeable estates will be.
In short, the loved ones you leave behind may well have to pay more inheritance tax from April 2027, and will thus inherit less of your estate than you’d planned for.
Stick with us as we explore the current and future state of inheritance tax on pensions, to help you better navigate the jargon, become more tax efficient, and make the most of your pension—both for yourself and your beneficiaries.
Contents:
- Introduction
- The current state of pensions and inheritance tax
- Proposed inheritance tax changes to pensions: April 2027 onwards
- Who will the changes to pension inheritance tax affect?
- Pensions and inheritance tax for couples versus individuals
- How to be tax-efficient and pay less inheritance tax on pensions
- Conclusion
The current state of pensions and inheritance tax
At time of writing (August 2025), pensions are not subject to inheritance tax, because they are not considered to be a part of a person’s ‘estate’ when that person dies. Despite not being considered part of a person’s estate, however, private pensions can typically be left to nominated beneficiaries (singular or multiple), depending on the pension plan, entirely tax-free.
Inheritance tax, on the other hand, is currently applied to other types of wealth, deemed part of a person’s estate. These are defined as a person’s money, property and possessions at the time of their death.
The named beneficiaries of a deceased’s estate are obliged to pay inheritance tax on the estate prior to receiving their portion of inheritance, provided the estate exceeds the IHT tax-free threshold once all the deceased’s debts are paid.
Exploring the IHT tax-free threshold
In the UK, no inheritance tax is due on the value of an estate up to the tax-free threshold of £325,000. Inheritance tax is charged at 40% on the value of the estate exceeding this threshold.
For example, let’s say that when Ian dies, he leaves behind a house worth £300,000, as well as £20,000 cash and £30,000 worth of possessions. Ian’s estate is valued at £350,000 in total, and after paying off Ian’s outstanding debts, is valued at £340,000. The estate must pay 40% inheritance tax on the £15,000 exceeding Ian’s personal IHT tax-free allowance, equalling an inheritance tax bill of £6,000.
In the example given above, it would be the duty of Ian’s appointed personal representative (PR) to both pay off Ian’s debts, using his estate, and to calculate and pay the IHT bill.
Pensions: death benefits and income tax
Prior to April 2027 (assuming that the government’s proposed tax changes are implemented then as planned), your pension is not considered a part of your estate.
Instead, when you die, you may leave a portion of your unused pension pot to beneficiaries of your choosing, without them having to pay any inheritance tax on it. This type of inheritance is called ‘death benefits’.
However, the recipient(s) of your remaining pension pot may still have to pay income tax on your pension, depending on the type of plan you have and the age at which you die.
Different death benefits: Defined benefits versus defined contributions
There are two main types of standard private pension plans available in the UK: ‘defined benefits pensions’ and ‘defined contributions pensions’. The former is most common in the public sector and the latter most common in the private.
Defined benefits (DB) pension plans provide you with a defined, guaranteed income for life, based on your salary and length of service at the time of your retirement. DB pensions may pay out to your beneficiary either a lump sum or a percentage of your remaining pension as income when you die.
Defined contributions (DC) pension plans are a type of pension pot that you and your employer both contribute to over time. The size of your pension pot is determined by the size of contributions made, as well as the performance of the investments made by the pension provider. DC pensions can be withdrawn by your beneficiaries in a few different ways, including as a tax-free lump sum, as a drawdown (so some of the pension pot remains invested in a drawdown fund), or as a guaranteed income (known as an annuity).
Income tax on death benefits: Over or under 75-years-old
If you leave behind a defined benefits pension, your chosen beneficiaries will have to pay income tax on it, no matter the amount.
On the other hand, if you leave behind a defined contributions pension, then your beneficiaries only have to pay income tax if you are older than 75-years-old when you die. If you die before 75, beneficiaries need only pay income tax on their inherited pension withdrawals if the pension pot exceeds the tax-free threshold of £1,073,100.
Of course, from April 2027, beneficiaries of your remaining pension pot may have to pay inheritance tax as well as income tax.
Proposed IHT changes to pensions from April 2027
In a bid to raise money for the exchequer, the government announced a major change to pension inheritance tax law in the Autumn Budget 2024.
As of April 2027, unused pensions and death benefits (as described above) will be included in a person’s estate and deemed taxable under the inheritance tax. The tax-free threshold is set to remain £325,000 per person, or per estate, until at least 2030.
In short, your pension will no longer be exempt from inheritance tax and will instead be included in all inheritance tax calculations after your death, as of the 2027-28 tax year.
Who will the changes to pension inheritance tax affect?
According to the government’s own sources, the majority of UK taxpayers will not be affected by the proposed changes to inheritance tax law. Over the course of the 2027-28 tax year, it is estimated that 10,500 estates will pay inheritance tax for the first time, and a further 38,500 estates will see an increase on what they would have paid in IHT previously.
Pensions and inheritance tax for couples versus individuals
The new IHT laws discussed in this guide will affect couples and single individuals differently.
If you are married or in a civil partnership, you are legally entitled to the entirety of your deceased partner’s estate tax free. Additionally, your spouse/partner may transfer the unused portion of their £325,000 IHT tax-free allowance to you for future use.
This allowance may be increased by a further £175,000 per person if your partner leaves you your house and you bequeath this residence to your children or grandchildren when you die.
In essence, surviving partners of a marriage or civil partnership are not only exempt from paying inheritance tax on the estate they inherit, but also eligible to inherit the full IHT tax-free allowance of the deceased partner—meaning they may increase their own £325,000 allowance up to a maximum of £1,000,000.
Single individuals and those not legally married or civil partnered do not enjoy the same tax advantages, and may have to pay IHT on any estate they inherit. Moreover, they will not typically be able to increase their tax-free allowance beyond the individual £325,000.
The best way to illustrate the new laws surrounding inheritance tax and pension pots is to give a few examples.
Example A) Calculating inheritance tax on pensions for individuals
Let’s say that Becky, who never married, dies leaving behind a house worth £150,000, possessions worth £50,000, and investments in ISAs totalling £100,000. She also leaves behind a defined contributions pension pot of £300,000.
Previously, Becky’s estate would have totalled £300,000 in value and thus would not have been eligible for inheritance tax. However, as of April 2027, Becky’s £300,000 DC pension will be included in her estate valuation, placing the estate at £600,000 in value.
If Becky dies after April 2027, the £275,000 of her estate surpassing her IHT allowance will be taxed at 40%. Becky’s estate’s IHT bill will be £110,000.
Example B) Calculating inheritance tax on pensions for spouses
In this example, let’s say that Becky married and has survived her husband, Rowan, with whom she has a child. Rowan left Becky an estate worth £300,000 and a pension packet worth £500,000. He also left Becky his entire £325,000 tax-free allowance, bringing Becky’s overall allowance to £650,000.
Becky decides that when she dies, she will leave her family home—which had previously been in both her and Rowan’s name—to their daughter. Becky and Rowan’s joint £350,000 ‘residence nil-rate band’ allowance, granted for bequeathing a main residence to direct descendants, brings Becky’s overall IHT tax-free allowance to £1,000,000.
If we combine Becky’s estate of £600,000, as in Example A (£300,000 plus an additional £300,000 in a pension pot) with her tax-free inheritance from Sue of £800,000 (£300,000 plus a pension pot of £500,000), then Becky’s new estate is worth £1.4 million.
Prior to the new IHT laws, the £800,000 of this held in private pensions would not have been considered IHT taxable, and so Becky’s IHT allowance would not have been exceeded. From 2027 onwards, however, the £400,000 exceeding Becky’s £1M allowance would be inheritance taxed at 40%, equalling a bill of £160,000.
How to be tax-efficient and pay less inheritance tax on pensions
If your or your loved one’s estate is liable to fall within the bracket of the newly or increasingly taxed, then there are a few key considerations you might like to make to make your pension and estate stretch further.
Transferring your estate’s wealth into a trust
Perhaps the most effective means of wealth management for inheritance tax deduction is the transfer of your estate into a trust.
There are a number of different trusts you can move your wealth into (discretionary, bare, life interest), each with different implications for those left behind after your death, which tend to be favourable in terms of lowering your estate’s inheritance tax bill.
If your elected trustee suspects that they have underpaid tax on your trust at any point, they should submit a voluntary disclosure to HMRC immediately.
Investing in a LISA versus a private pension
Saving for retirement can be made more tax efficient by investing in a LISA, instead of in a private pension, because withdrawals from LISAs for your retirement income are tax-free. Unfortunately, neither a LISA nor private pension will be exempt from inheritance tax in the event of your death, once the new legislation comes into force in 2027.
Conclusion: Seeking the advice of a personal tax professional
The best way to make sure you are navigating the complex world of later life wealth management and inheritance tax on your pensions is to seek the professional advice of a personal tax advisor.
Only those who have proper training and expertise in tax law can provide a tailored solution to ensure you make the most of your pension whilst you’re alive, and leave as much of it, untaxed, to loved ones after you’re gone.
