Inheritance Tax

Are pensions subject to inheritance tax?

Answered by Jordan Onraet-Wells, Founder & Chartered Tax Adviser (CTA). Published 17 July 2026. Last reviewed 17 July 2026.

The short answer

No, not usually under current rules: for the 2026/27 tax year most unused pension funds and lump sum death benefits sit outside your estate, so they normally pass to your beneficiaries free of inheritance tax. That changes on 6 April 2027, when most unused pension funds and pension death benefits will be counted as part of your estate and taxed at up to 40%. The new rules apply only to deaths on or after 6 April 2027; deaths before that date keep the current, more favourable treatment.

Under current rules most pension death benefits escape inheritance tax because the scheme pays them at its discretion.
For deaths on or after 6 April 2027, most unused pension funds and death benefits are added to the estate and taxed at 40% above the available allowances, or 36% where at least 10% of the net estate goes to charity.
The £325,000 nil-rate band and £175,000 residence nil-rate band are frozen until 5 April 2031, so adding pensions will pull more estates into IHT.
Pensions passing to a spouse, civil partner or UK charity remain exempt, and death-in-service benefits and most dependants' scheme pensions are excluded.
If you die at or after age 75, beneficiaries also pay income tax at their marginal rate on what they draw, so from April 2027 the same pot can face both taxes.

What changes on 6 April 2027

Pensions have long escaped inheritance tax because most schemes pay death benefits at the administrator's discretion, keeping the fund outside your estate. Finance Act 2026 ends that: for deaths on or after 6 April 2027, most unused pension funds and pension death benefits are added to your estate and taxed under the normal IHT rules, at 40% above your available allowances (36% where at least 10% of the net estate passes to charity). Death-in-service benefits from a registered scheme and most dependants' scheme pensions stay excluded, and anything passing to a spouse, civil partner or UK charity remains exempt. Your executors (personal representatives) will report and pay the tax, and beneficiaries can direct the pension scheme to pay HMRC straight from the fund.

The trap: IHT plus income tax after age 75

Income tax on inherited pensions is a separate charge and is not changing. Die before age 75 and your beneficiaries can usually draw the fund free of income tax; die at or after 75 and they pay income tax at their own marginal rate. From April 2027 the same fund can also suffer IHT, so a death at 75 or later can mean both taxes on one pot. HMRC has confirmed one softener: the slice of the fund equal to the IHT paid does not count towards the beneficiary's taxable income, so income tax applies only to what is left after IHT.

What to do now

Review your beneficiary nominations (a spouse or civil partner still inherits free of IHT), weigh drawing or gifting surplus pension against the income tax cost, and remember that moving abroad does not help: a UK-registered scheme such as a SIPP stays within UK inheritance tax even after you cease to be a long-term UK resident. Our guide to pensions and inheritance tax covers the change in full; inheritance tax explained covers the wider rules and allowances.

Go deeper

Sources and further reading

This is general information for the 2026/27 UK tax year, not personal tax advice; speak to a Chartered Tax Adviser about your own position.

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