For lots of people, their pension is now one of the biggest assets they will ever own, sometimes even bigger than the family home. Since pension freedoms arrived in 2015, pensions have also become a popular way of passing wealth down the family in a tax-efficient way.
But that landscape is shifting.
From 6 April 2027, unused pension funds are due to be brought into the Inheritance Tax (IHT) net in a much more direct way. That doesn’t mean pensions suddenly “become bad”, but it does mean the rules around what your children can inherit are getting more complicated.
This article looks at:
1. Whether you can leave your pension to your children
2. How it’s taxed now
3. What is due to change from 2027
4. Some practical planning points to think about.
This is general information only, not personal financial advice. Your own circumstances and pension scheme rules really matter here.
In many cases, yes but it depends on the type of pension you have and how your scheme is set up.
With a defined contribution (DC) pension, there is a pot of money invested in your name. When you die, the value of that pot can usually be passed on to the people you have chosen: children, spouse, partner, other family members or even a charity.
Your beneficiaries will normally have choices such as:
1. Taking a lump sum
2. Keeping the money invested and taking an income (drawdown)
3. Using the funds to buy an annuity (a guaranteed income).
Exactly which options are available will depend on the provider and the scheme rules.
A defined benefit (DB) or final salary scheme works differently. There usually isn’t an individual “pot” in your name. Instead, the scheme promises to pay you an income for life.
On death, these schemes typically:
1. Pay a spouse’s or civil partner’s pension
2. Sometimes provide an income (or fixed-term pension) for a dependent child up to the age of 23 in full time education or legally adopted children.
3. May pay a lump sum if you die while still in service or before taking your pension.
You generally cannot pass a DB pension “pot” on to adult children in the same flexible way as a DC pension, because there isn’t a separate pot for them to inherit.
Whatever type of pension you have, it is really important to:
1. Complete and keep up to date the nomination or expression of wishes form for every pension scheme you hold
2. Review it after major life events – marriage, divorce, a new partner, children or grandchildren, bereavement, moving home and so on.
These forms usually guide the pension trustees or scheme administrators when they decide who receives your benefits. Where they have discretion over who gets what, that has historically been one of the reasons pension death benefits have often fallen outside your estate for IHT under current rules.
Let’s start with the position as things stand for the 2025/26 tax year.
- Income tax – the age 75 line
- For Income Tax, the key dividing line is whether you die before or after age 75.
If you die before age 75
In many cases, your beneficiaries can receive lump sums or inherited drawdown from your pension free of Income Tax, as long as certain conditions are met and the payments fall within the relevant tax-free allowance for lump sums and death benefits.
If you die at age 75 or older
Any money your beneficiaries withdraw from an inherited pension is taxed as their income at their marginal rate (for example 20%, 40% or 45%). The pension itself is not taxed on death, but withdrawals are.
These rules can be quite technical and can depend on timings and how your scheme is structured, but the age-75 cut-off is the broad principle.
Now, for most people most DC pensions sit outside your estate for IHT. That is largely because many UK pension schemes are structured so that the trustees have discretion over who receives the benefits, rather than the member having an absolute right to the funds.
The result is that, under current rules, pensions are often ignored when working out whether your estate is above the IHT threshold. This is one of the reasons advisers have often said:
“Spend your taxable assets first and leave the pension until last.”
From 6 April 2027, the government plans that most unused pension funds and certain lump sum death benefits will be brought into the value of a person’s estate for Inheritance Tax purposes.
In practice, that means:
1. The value of your remaining pension at death will usually be added to the rest of your estate – your home, investments, savings, business interests and so on
2. If the total value is above your available IHT allowances, up to 40% IHT could be due on the excess.
The policy aim is to reduce the use of pensions as a pure inheritance planning vehicle and to bring their treatment more in line with other assets when someone dies.
At the time of writing (November 2025), the direction of travel and the start date of 6 April 2027 have been confirmed in government policy papers and draft legislation, but some of the detailed rules and HMRC guidance are still being finalised. The core principle – bringing most pension death benefits into the estate for IHT – is now well established, but the exact fine print could still evolve.
The basic structure of IHT itself has not changed, but frozen thresholds and rising asset values mean more estates are drifting into the net.
Broadly:
- The nil rate band (NRB) is £325,000 per person
- The residence nil rate band (RNRB) is up to £175,000 per person if a qualifying main home is left to direct descendants (such as children, stepchildren or grandchildren).
This means that, in broad terms:
- A single person can often pass up to £500,000 free of IHT if the RNRB applies
- A married couple or civil partners can often pass up to £1 million between them, because any unused allowances can usually be transferred to the surviving spouse or civil partner.
Anything above the available allowances is normally taxed at 40%, although this can be reduced to 36% if at least 10% of the net estate is left to charity.
Right now, pensions are usually not counted in those figures. From 2027, for many people, they will be.
Based on current government policy and consultations, some benefits are expected to remain outside the estate for IHT even after 2027. These include:
1. Death-in-service lump sums from registered pension schemes
2. Dependant’s scheme pensions from defined benefit or similar arrangements (for example, a spouse’s pension paid after your death), which will continue to be treated as income for the recipient rather than as part of your estate.
However, for most people with defined contribution pensions, unused fund values left on death are expected to be factored into the IHT calculation from 2027.
The more uncomfortable part is the risk of the same money facing two layers of tax.
If you die after age 75, then from 2027 onwards:
1. Your remaining pension will usually be counted for IHT as part of your estate; and
2. Anything your children or other beneficiaries withdraw from the inherited pension will still be subject to Income Tax at their marginal rate, just as under the current rules.
In other words, the pot can be exposed to both IHT and Income Tax.
A simplified example:
Here is a very simplified illustration, just to show the direction of travel. Real-life planning will always be more nuanced.
Scenario:
A married couple both die after 6 April 2027.
Main home: £750,000
Combined defined contribution pensions: £750,000
Total estate value for IHT purposes: £1.5 million
If they can use the full combined £1 million of NRB and RNRB between them, the first £1 million is covered by allowances and the remaining £500,000 is taxed at 40%, creating an IHT bill of £200,000.
Under today’s rules (before 2027), the pensions would typically sit outside the estate, so only the £750,000 house would be tested against the £1 million allowances – likely resulting in no IHT at all.
After the rule change, part of that £200,000 IHT bill effectively relates to the pension. Then, as the children draw income from the inherited pension, they may also pay Income Tax at their own marginal rates. This is why many higher-value estates and higher-rate taxpayer children could see a noticeable increase in the overall tax bite on inherited pensions.
The changes are unlikely to affect everyone, but several groups are more exposed:
- Couples with a valuable home and substantial pensions; for example, a family property plus mid-to-large DC pension pots
- Single or divorced individuals, who effectively have a lower overall IHT allowance (typically up to £500,000 if they own a qualifying home and leave it to direct descendants)
- Families whose estates are already close to the existing thresholds, but which could easily be tipped over once pensions are included.
Official estimates suggest that bringing pensions into the IHT calculation will make tens of thousands more estates liable for IHT, and will increase the average bill for many others.
Source: Inheritance Tax on unused pension funds and death benefits - GOV.UK
21 July 2025
This is not about emptying pensions in a rush. For most people, the pension is still one of the most flexible, protected and tax-efficient parts of the financial plan.
But it is sensible to start thinking about how pensions fit into your overall estate planning.
Here are some questions to explore with a qualified adviser.
• Are your nomination forms up to date?
• Check every pension you hold – including older workplace schemes you might have forgotten about.
• Make sure the people you want to benefit are actually listed.
• If your family circumstances have changed (for example, divorce, remarriage or a blended family), this is a priority job.
• What does your estate look like including pensions?
As a starting point, add up:
- Your home and any other properties
- Cash, investments, ISAs and savings
- Business interests
-Your pensions, using current fund values.
Then compare this against:
- Your £325,000 nil rate band
- Any residence nil rate band that might apply
- Any spouse or civil partner whose allowances might transfer to you or from you.
This gives you a rough feel for whether the 2027 changes are likely to push your estate into IHT, or increase a liability that is already there.
The traditional thinking has often been:
1. Spend cash and other taxable investments first
2. Use ISAs later
3. Leave pensions until last, because of their IHT advantages.
From 2027 onwards, that simple hierarchy may not always be the most efficient answer. Depending on your circumstances, it might make sense to:
1. Draw a bit more from the pension earlier in retirement
2. Preserve some other assets which may be treated more favourably for IHT
3. Blend different income sources year by year to manage overall tax and risk.
This is an area where proper, personalised cashflow planning really earns its keep.
Depending on your goals, your adviser might look at:
1. Lifetime gifting, where appropriate, to start passing wealth on gradually
2. Life insurance written in trust to help cover a known future IHT bill
3. Investments that may qualify for business relief, where suitable and where the risks are understood
4. Trusts or family investment companies to help manage how and when children access capital.
All of these come with trade-offs, including loss of control, extra complexity, charges, investment risk and their own tax rules so they are not quick fixes or right for everyone.
Remember your will does not usually control who gets your pension. Those decisions are usually guided by the scheme rules and your nomination forms. But your will and pension nominations should still work together, so you are not accidentally favouring (or excluding) someone important. This is particularly important in second marriages, blended families and situations where there are children from previous relationships.
Pensions remain a powerful tool both for funding your own retirement and for supporting the next generation. But from 6 April 2027, the way they interact with Inheritance Tax is changing.
In short:
1. Before 2027, pensions are usually outside IHT, so the main question is Income Tax and whether you die before or after age 75
2. From 2027, for many people, pensions will be counted in the estate for IHT and will continue to be taxed as income as beneficiaries withdraw money.
You do not necessarily need to tear up your existing plans. But you may want to stress-test them against the new rules and check that the way you are using your pensions, ISAs, property and other assets still makes sense.
This article is based on our understanding of current UK legislation, tax rules and HMRC practice as at November 2025. These may change in future, and their impact will depend on your individual circumstances and where you live in the UK.
A pension is a long-term investment the fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
Will writing, Estate planning and Tax planning are not regulated by the Financial Conduct Authority.
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