What you need to know: The 2027 IHT-on-pensions reform
Quick answer: From 6 April 2027 , unused defined-contribution pension pots — SIPP, personal pension, AVC — will be included in the IHT estate of the deceased. Defined benefit pensions and annuities are outside the reform (they don't have a pot to inherit). The reform is expected to bring tens of thousands of estates…
Key points:
- Defined-contribution pensions are outside the IHT estate.
- Death before age 75: beneficiaries inherit tax-free up to the LSDBA (£1,073,100).
- Death at or after age 75: beneficiaries inherit taxable at their marginal income tax rate.
From 6 April 2027, unused defined-contribution pension pots — SIPP, personal pension, AVC — will be included in the IHT estate of the deceased. Defined benefit pensions and annuities are outside the reform (they don't have a pot to inherit). The reform is expected to bring tens of thousands of estates into IHT for the first time. For a pension pot inherited at death after age 75, the combined effective rate (IHT at 40% on the gross, then income tax at the beneficiary's marginal rate on the residual) can be 67% — making lifetime drawdown a strongly preferred strategy.
What changes in April 2027
Pre-April 2027 (current):
- Defined-contribution pensions are outside the IHT estate.
- Death before age 75: beneficiaries inherit tax-free up to the LSDBA (£1,073,100).
- Death at or after age 75: beneficiaries inherit taxable at their marginal income tax rate.
From April 2027:
- Unused defined-contribution pension pots are added to the IHT estate.
- IHT may apply at 40% on amounts above the nil-rate bands (£325,000 + RNRB up to £175,000).
- For death at or after age 75: IHT applies first, then income tax on the residual at beneficiary's marginal rate.
- For death before age 75: IHT applies first, then no further income tax (LSDBA may still apply).
Worked example: death at age 78, £800k pension pot
Pension at death: £800,000. Other estate: £500,000. Total estate: £1.3m.
Single person with no spouse — nil-rate band £325k, RNRB £175k (passing main residence to direct descendants). Total tax-free allowance: £500k.
| Total estate (incl. pension) | £1,300,000 |
| Tax-free allowances | −£500,000 |
| IHT-able estate | £800,000 |
| IHT at 40% | £320,000 |
Apportioned to pension: £800k / £1.3m = 61.5% of the IHT bill = £196,800 of IHT falls on the pension portion.
| Gross pension | £800,000 |
| IHT on pension portion | −£196,800 |
| Net to beneficiary (pre-income-tax) | £603,200 |
| Beneficiary income tax (40% higher rate) | −£241,280 |
| Net to beneficiary after both taxes | £361,920 |
Effective tax rate on the £800k pension: 54.8%. If the beneficiary is at additional rate (45%), the rate climbs to ~57%. Pre-2027, the same scenario would have produced £480,000 net to the beneficiary — a 33% income-tax-only hit.
Who is most affected
- Higher-rate-taxpayer beneficiaries inheriting from pensions after age 75: the combined tax bite is the biggest single hit in the UK system at ~67%.
- Estates already at IHT cap: pension brings them further over the threshold.
- Single people / no spouse: can't use spousal transfers to defer or split.
- People who deliberately held pensions for inheritance: the strategy is undermined.
Planning strategies that work
1. Spend the pension first in lifetime
Once you start drawing pension income — basic rate, higher rate, additional rate as applicable — the income is taxed once. Compare with the 60%+ combined tax at death. Drawing down faster (and using ISA / other wrappers for unspent income) avoids the 2027 IHT exposure.
2. Use tax-free lump sums while you can
The 25% tax-free lump sum (subject to the LSA cap of £268,275) is not affected by the 2027 reform. Withdrawing the full tax-free portion early and gifting (or investing outside the pension) shifts wealth out of the eventual IHT-able estate.
3. Gift early (the 7-year PET rule)
Gifts made 7+ years before death are outside the estate for IHT. If you give £100k to children at age 70 and live to age 77+, that £100k is outside the IHT calculation — no 40% on it.
4. Spousal exemption — spread the pension
Married couples can use both nil-rate bands and RNRB allowances (combined £1m where each leaves to the other plus to direct descendants). The first spouse can transfer pension to the second tax-free, but the second spouse's estate is then larger when they die.
5. Defined benefit pensions and annuities
DB pensions and lifetime annuities are outside the reform — they end at the deceased's death and there's no "pot" to inherit. If you have a DB pension, it can pay survivor's pension to a spouse without IHT.
The pre-2027 window
The reform takes effect on 6 April 2027. Between now and then, current rules apply. Key planning moves to consider in 2026/27:
- Withdraw and spend (or invest outside pension) more aggressively than you might have otherwise.
- Use lifetime gifting allowances (£3,000/year, surplus income, wedding gifts).
- Consider whole-of-life insurance written in trust to cover the future IHT bill on the pension portion.
- If you're 75+ and have a large pension, consider drawing it down faster — even with the income tax cost.
Sources and methodology
The 2027 IHT-on-pensions reform was announced in the Autumn Statement 2024 (October 2024). Final legislation expected in the Finance Bill 2026 with effect from 6 April 2027. See HMT's policy paper on pension IHT changes. For complex estate planning, see the tax adviser recommendation. The methodology page documents sources.
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