How will the April 2027 pension changes affect inheritance tax?

Author: Alistair Robertson-Göpffarth, Consultant Private Client Solicitor & Notary Public | Last updated: 20th August 2026 | Read time: 9 minutes

From 6 April 2027, most unused pension funds will count towards your estate for inheritance tax. If you or a family member holds significant pension savings, here’s what’s changing, who it’s likely to affect, and what to check now.

Key takeaways

• From 6 April 2027, most unused pension funds will count as part of your estate for inheritance tax, under rules confirmed in the Finance Act 2026.
• A family with no inheritance tax bill today could face a six-figure liability once their pension is included, with nothing else about their finances changing.
• Married couples and civil partners are usually protected on the first death. The new rules are most likely to have an impact upon the second death, when the combined estate passes to children or other beneficiaries.
• Wills written some years ago, including those with fixed cash gifts, Nil Rate Band trusts, or charitable legacies, may no longer work as intended once pensions are added to the calculation.
• Pensions still pass outside your will, so your executors may need to find cash to pay the tax before probate, though a new withholding option can ease this.

The short answer

Until now, most defined contribution pension funds, the kind where you or your employer pay into a pot invested on your behalf, have sat outside your estate for inheritance tax purposes. From 6 April 2027, that changes.

Under reforms confirmed in the Finance Act 2026, most unused pension funds will be included when valuing your estate for inheritance tax. Estates with little or no exposure today could face a substantial bill, and wills or financial plans drawn up under the old rules may no longer achieve what you intended.

Death in service benefits paid from a registered pension scheme stay outside the calculation, and pension death benefits passing to a spouse or civil partner keep their exemption. Everything else held in a personal pension is now in scope.

If your pension forms a meaningful part of your wealth, treat it as part of your estate planning now, not a separate matter for your financial adviser alone.

• £1,000,000 — typical combined tax-free allowance for a married couple or civil partners
• £240,000 — example inheritance tax bill once an £800,000 pension is added to an existing £800,000 estate
• 36% — reduced inheritance tax rate when at least 10% of the estate goes to charity, down from 40%

Why pensions were different

Until now, most defined contribution pension funds have not formed part of your estate for inheritance tax purposes. Pensions were designed to fund retirement, not to pass on wealth. This was reflected in tax rules.

As a result, many families have built up substantial pension savings that sit outside their inheritance tax calculations.

That position is changing. Reforms confirmed in the Finance Act 2026 will bring pensions into scope for inheritance tax on death, coming into effect from 6 April 2027.

The practical impact: estates that previously had little or no inheritance tax exposure may now face a significant bill, and wills or financial plans made under the old rules may no longer work as intended.

Who is likely to be affected

You are more likely to feel the impact of these changes if you:

• Have a defined contribution pension with a meaningful balance, particularly if it has been left to grow rather than drawn down.
• Own a family home and hold other savings or investments alongside a pension, so your combined wealth exceeds the available tax-free allowances.
• Made your will some time ago, when pension assets were not expected to affect your inheritance tax position.
• Have fixed cash gifts in your will, such as a sum to a grandchild or a favourite charity, because how the tax is funded can directly affect what each beneficiary actually receives.

Married couples and civil partners are usually protected on the first death, because assets passing between spouses are generally exempt from inheritance tax. The second death, when the full combined estate passes to children or other beneficiaries, is where the new rules are most likely to bite.

Putting numbers on it: a worked illustration

The examples below use round figures to illustrate the potential impact. They’re simplified for clarity and aren’t individual tax advice; everyone’s position is different.

The allowances available on death

Most married couples and civil partners can currently shelter a combined total of up to £1 million from inheritance tax, made up of the Nil Rate Band and the Residence Nil Rate Band:

These figures assume both allowances from the first spouse’s death have been transferred to the survivor. The RNRB carries its own conditions and tapers away on larger estates.

Example A: the position today (pension outside the estate)

Consider a family with the following assets on the second death:

Under current rules, no inheritance tax is payable, and the family can reasonably assume their affairs are in order.

Example B: the position from April 2027 (pension included)

Using the same family, but now with the pension counted as part of the estate:

The key point: This family with no inheritance tax bill today could face a £240,000 liability from April 2027, simply because the pension now counts alongside the rest of the estate. Nothing about their circumstances has changed, only the law.

Why your will may need a second look

The change to the calculation is only part of the picture. How your will is drafted determines who bears the cost of that tax, and that’s where many families could be caught out.

Fixed cash legacies

Many wills include gifts of a specific sum: “£50,000 to my nephew, £50,000 to my goddaughter, and the rest to my children.” On the face of it, the nephew and goddaughter receive a guaranteed amount.

But whether those gifts are paid before or after inheritance tax, and how your will’s tax provisions interact with the new pension-inclusive calculation, can significantly affect what each person actually receives.

If tax is now payable where it wasn’t before, the residue passing to your children is reduced. In some cases the drafting may mean the fixed-gift recipients bear some of the tax too. Either way, the outcome may look very different from what you intended.

Nil Rate Band trusts and formula clauses

Over the past two decades, it was common to include a Nil Rate Band trust in a will, a structure that ring-fenced the tax-free threshold on the first death to make full use of it. Many wills also include formula clauses that calculate a gift by reference to the available Nil Rate Band.

Where the estate now includes pension assets, both the tax calculation and the amounts flowing through these structures can change. A formula clause written in 2010 may produce a very different outcome and a different distribution in a post-2027 world.

Charitable giving: opportunity, complexity, and a hidden cash problem

Charitable giving and inheritance tax interact in a way that becomes both more powerful and more complicated once pension assets are in the picture. There are three issues worth understanding.

The 10% rule and the reduced rate

If a will leaves at least 10% of the ‘baseline amount’ (broadly, the taxable estate above the available nil rate bands) to qualifying charities, the inheritance tax rate on the rest of the estate falls from 40% to 36%. This is a meaningful concession that many families overlook.

It doesn’t reduce the total outflow below what tax alone would have cost; the combined cost of charity plus tax is always slightly higher than tax without charity. But it means a meaningful charitable gift costs the family far less than its face value, because much of the gift is effectively funded by the tax saving.

Using our post-April 2027 figures, where the taxable amount is £600,000:

The charity receives £60,000, but the family’s net cost of making that gift is only £14,400. For every £1 the charity receives, the family contributes about 24 pence, with the remaining 76 pence recovered through the reduction in tax. For families with a genuine charitable intention, this makes the 10% legacy an efficient mechanism, more so than the same gift made informally during lifetime or outside the will.

A word of caution if your will already includes a charitable legacy

April 2027 also affects wills that already contain a fixed charitable gift. Because the pension is now counted in the estate, the baseline figure the 10% threshold is measured against is larger than before.

A fixed charitable legacy that was the right size under the old rules may now fall short of the 10% minimum, and miss the reduced rate entirely.

For example, a will leaving £20,000 to charity made sense when there was no taxable estate. Post-2027, with a taxable amount of £600,000, the 10% threshold needs a gift of at least £60,000. A £20,000 legacy falls short: it won’t trigger the reduced rate, tax still falls due at 40%, and the charity still receives less than it could.

If your will contains a fixed charitable sum, check whether it would still meet the 10% threshold once pension assets are brought in, and whether it should be expressed as a percentage of the estate rather than a fixed amount, so it adjusts automatically.

The liquidity problem: pensions do not pass under your will

There’s a further issue underneath all of this, which can come as a surprise to families.

Pension funds aren’t governed by your will. They pass according to the nomination you’ve made with your pension provider, typically to a surviving spouse, children, or a nominated trust. So even though the pension now counts towards the estate for inheritance tax, the money itself doesn’t automatically flow into the estate to help pay the bill.

The tax is instead allocated pro-rata across the estate, including the pension, with each part bearing a share in proportion to its value. In our example, with a total estate of £1,600,000 and tax of £240,000:

In principle, the pension bears half the bill, £120,000. The non-pension estate bears the other £120,000, split between the house (£90,000) and savings (£30,000). HMRC requires the tax attributable to the estate to be paid before probate is granted, and the pension passes separately to its nominated beneficiaries, so it isn’t automatically available to the executors for this.

There is some relief here. Personal representatives who reasonably expect inheritance tax to be due can direct the pension scheme administrator to withhold 50% of the taxable benefits for up to 15 months from the date of death, and pay HMRC directly before releasing the remainder to the beneficiaries. This doesn’t apply to exempt benefits, funds under £1,000, or continuing annuities. Plus, it’s not an automatic feature of every pension, but an option the executors need to actively request.

Where this option isn’t used, or doesn’t cover the full pro-rata share, the executors must still fund the estate’s portion from the assets they hold directly.

Where the cash pressure falls

In this example, the executors hold the house (worth £600,000) and savings (worth £200,000). The demands on these assets before residue can be distributed are:

• Estate’s pro-rata inheritance tax share: £120,000
• Fixed legacies (£50,000 to a nephew, £50,000 to a godchild): £100,000
• Total: £220,000

The liquid savings available are only £200,000, so the shortfall is £20,000.

Even with the pension’s own withholding option in place, the executors could be short before a penny reaches the residuary beneficiaries, and the only asset left is the family home.

The result: executors may be forced to sell the family home, or arrange short-term bridging finance, to meet a liability that’s partly attributable to pension wealth already passed directly to nominated beneficiaries outside the estate.

This isn’t a reason to avoid charitable giving or ignore the reduced rate. But it’s a strong reason to review the funding mechanics of your will alongside your pension nominations, life assurance, and estate liquidity. These conversations, often held separately, now need to be joined up.

Common mistakes

• Assuming an old will is still fit for purpose. Review any will drafted before pensions were brought into scope, especially one with fixed gifts or trust structures.
• Treating pension nominations and the will as separate matters. Check both together: the nomination decides who receives the pension, and the will decides who bears the tax.
• Leaving a fixed charitable sum that no longer meets the 10% threshold. Consider expressing charitable gifts as a percentage of the estate rather than a fixed amount.
• Assuming the family home is safe from a forced sale. Check whether the estate has enough liquid assets to cover its pro-rata tax share and any fixed legacies.
• Assuming this only affects very wealthy families. Review the numbers if your combined pension, home, and savings could approach £1 million.

What should you do now

The April 2027 date is close enough that early action makes sense. Start with these questions:

• Is my will up to date? If it was drafted more than a few years ago, it may not reflect the new inheritance tax landscape. A review needn’t be a rewrite, but it should check the distribution and tax provisions still work as you intend.
• Does my will include fixed cash gifts? If so, confirm who bears the tax if a bill arises, and whether the amounts are still right.
• How large is my pension relative to my other assets? If it’s a significant part of your wealth, treat it as a core part of your estate planning, not a separate matter.
• Have I discussed my pension nominations recently? They aren’t governed by your will, so how the nomination and the will interact matters more once pensions are part of the picture.
• Should I revisit any trust structures in my will? If it includes a Nil Rate Band trust, a discretionary trust, or an interest in possession arrangement, check how the new rules affect them.

Get in touch

If you would like to review your will or discuss how the April 2027 changes affect your estate planning, Alistair Robertson-Göpffarth would be glad to help. Contact us to arrange an initial conversation.

Get in touch

FAQs

Will my pension be taxed twice, once for income tax and again for inheritance tax?

The two taxes apply to different things. Income tax can apply when money is drawn from a pension, while inheritance tax from April 2027 applies to what’s left in the fund when you die. Both can affect the same pot at different points, so check how they interact with your adviser.

Does the April 2027 change apply if I’ve already retired and I’m drawing my pension?

Yes. If you still have unused funds in a defined contribution pension when you die, they’re brought into your estate under the new rules regardless of your age or retirement status. What matters is the value left in the pot, not whether you’ve started drawing from it.

What happens to my pension if I leave everything to my spouse or civil partner?

Pension death benefits passing to a surviving spouse or civil partner keep their exemption from inheritance tax, in the same way other spousal transfers do. The new rules are most likely to affect what happens on the second death.

Will death in service benefits from my employer be included?

No. Death in service benefits paid from a registered pension scheme stay outside the scope of these changes and won’t be counted as part of your estate for inheritance tax.

Do I need to change my pension nomination as well as my will?

Review both together. Your pension nomination decides who receives the fund, while your will decides who bears the resulting tax, and from April 2027 those two decisions interact more directly than before.

Alistair Robertson-Gopffarth

Consultant Private Client Solicitor & Notary Public

After serving for over 20 years as a submarine warfare officer in the Royal Navy, Alistair requalified as a solicitor in 2015. Alistair focuses his practice on private client and cross-border legal matters, and also qual...

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This article is general information about inheritance tax and pensions in England and Wales and is not legal advice. The law and figures can change, and every situation is different, so please speak to a qualified private client solicitor about your circumstances.