For years, your pension has been one of the most tax-efficient ways to pass wealth to the people you love. Unused pension funds have usually sat outside your estate, which meant they could often pass to your children free of inheritance tax. Many people have built their whole plan around exactly that, spending other savings first and leaving the pension untouched.
From 6 April 2027, this changes. The new pension inheritance tax rules mean most unused pension pots will count towards your estate — and a survey by Standard Life in February 2026 found that 89% of UK adults did not know the change was coming.
If you have a pension and you have not looked at your estate plan recently, this is the one thing to read this year. Here is what is happening, who it affects, and what you can sensibly do about it — without the jargon.
What is changing with pension inheritance tax in 2027
From 6 April 2027, most unused pension funds and pension death benefits will be counted as part of your estate for inheritance tax purposes. That includes personal pensions, SIPPs and workplace defined contribution pots. Above the tax-free thresholds, that money can then be taxed at 40%, in the same way as the rest of your estate.
This is not a rumour or a proposal. It became law in the Finance Act 2026, which received Royal Assent on 18 March 2026, and it applies to deaths on or after 6 April 2027. The government’s stated reason is that pensions were increasingly being used to pass on wealth tax-free, rather than to fund retirement, and it wants to close that gap.
In short: a pot you leave undrawn, which today might pass to your children free of inheritance tax, could from 2027 be taxed before it reaches them.
The thresholds, briefly
Inheritance tax is only charged on the value of an estate above certain tax-free bands.
- The nil-rate band is £325,000. It has been frozen at that level since 2009 and is due to stay frozen until at least 2031.
- There is also a residence nil-rate band of up to £175,000, where your home passes to your children or grandchildren. It is gradually withdrawn for estates worth more than £2 million.
- Together that can mean up to £500,000 per person, or up to £1 million for a married couple or civil partners who make use of both allowances.
Once your pension is added to everything else you own, more estates will be pushed above these thresholds than before — without the family being any wealthier. If your total estate — home, savings, investments and now your pension — sits near or above these figures, this change is likely to affect you.
A simple example
Take a widow with a home worth £400,000, savings of £50,000 and a pension pot of £180,000 she has not touched. She leaves everything to her children, and her late husband’s allowances were not available.
- Today: the pension sits outside her estate. Her estate is £450,000, which is within her £500,000 of allowances, so there is no inheritance tax to pay.
- From April 2027: the pension is included. Her estate becomes £630,000, which is £130,000 over the allowances. At 40%, that is a bill of around £52,000.
Nothing about her wealth has changed. Only the rules have. This is not a niche issue for the very wealthy; it catches people with modest savings who simply have not had the chance to spend their pension down.
Who is not caught by this
It is not bad news for everyone, and some important protections remain.
- Anything you leave to your husband, wife or civil partner is still exempt. The spousal exemption is unchanged, so a pension passing to your spouse is not taxed on your death. The charge usually bites when the second partner dies and the estate passes to the next generation.
- Gifts to charity remain exempt.
- Death-in-service benefits paid from a registered pension scheme are excluded from the change.
If you are in a defined benefit (final salary) scheme, the position is more complex and depends on the scheme’s rules, so specific advice before 2027 is worthwhile.
The sting most people miss
There is a second, less obvious problem. If you die aged 75 or over, your beneficiaries may already have to pay income tax on what they withdraw from your pension. From 2027, the same money can also be inside your estate for inheritance tax.
Taxed twice, the effective rate on that money can reach 64% or higher in some circumstances. That is the figure that surprises people, and it is exactly the kind of outcome a little planning can soften.
What you can sensibly do now
You have until April 2027 — not to panic, but to plan. Planning takes time, and Wills drafted in a hurry rarely serve families as well as they should. A few practical steps:
- Review your expression of wishes and pension nomination. Most pensions are paid out according to this form rather than your Will, so it decides who benefits. It is one of the simplest and most useful things to check, and most people have not looked at it in years.
- Take a proper look at your whole estate. The change matters most when your pension is added to your home, savings and investments. You cannot plan around a number you have not worked out.
- Revisit your Will. If your Will and estate plan were built on the old assumption that your pension sits outside inheritance tax, that assumption no longer holds. Who inherits what, and in what order, may need rethinking.
- Consider whether a Will trust would help. A well-drafted trust does not hide assets from tax that is properly due, but it gives you more control over how your estate is structured and who ultimately benefits. For some families, the right structure brings real savings, or at least certainty.
- Get the right advice for the right question. Decisions about the pension itself — drawing it, moving it, or whether to spend it before other assets — are regulated financial matters, and you should speak to a regulated financial adviser about those. Decisions about your Will, your beneficiaries and how your estate fits together are where we can help.
How we can help
At Puna Legal, estate planning is all we do. We will look at how this change affects your estate specifically, make sure your Will still does what you intend, and explain every step in plain English — with fixed fees agreed before we start, and no pressure to buy anything you do not need.
Single Wills from £149 including VAT. Trusts from £439.
The first conversation is free and there is nothing to prepare. Call us on 0330 133 0930, email Nick@punalegal.co.uk, or get in touch here.
Based in Oxfordshire, advising clients across England and Wales.
This article is for general information and reflects the position at the time of writing. It is not legal or financial advice. Decisions about your pension should be taken with a regulated financial adviser.