Pension death benefits and inheritance tax from April 2027

The Position Before April 2027

Under current rules, most defined contribution pension arrangements do not form part of the deceased's estate for inheritance tax purposes.

In broad terms:

• Death before age 75 allows beneficiaries to receive pension benefits free of income tax
• Death after age 75 means beneficiaries pay income tax at their marginal rate
• In both cases, pension funds are generally outside the scope of inheritance tax

This treatment has led many families to preserve pensions while spending other assets first.

What Changes from 6 April 2027

From 6 April 2027:

• The value of unused pension funds and pension death benefits is added to the estate for inheritance tax
• This applies regardless of discretionary trust structures within pension schemes
• Income tax on pension withdrawals by beneficiaries continues to depend on age at death
• Inheritance tax and income tax are calculated separately and can both apply

This represents a structural change in how pensions are treated on death.

The Double Tax Risk Explained

The most significant consequence of the April 2027 change is the potential for double taxation.

First, inheritance tax:

• The pension value is added to the estate
• If the estate exceeds available nil rate bands, inheritance tax is charged at 40 percent

Second, income tax:

• After inheritance tax is paid, beneficiaries still pay income tax when they withdraw pension funds
• The rate depends on the beneficiary's marginal income tax band

This risk is greatest where death occurs at age 75 or over.

The Spousal Exemption and Why It Can Mislead

Pensions left to a surviving spouse or civil partner remain exempt from inheritance tax on the first death.

However:

• The pension then forms part of the survivor's estate
• On the second death, inheritance tax may apply to the pension value
• The tax is deferred, not eliminated

For estates already above inheritance tax thresholds, this can result in a substantial tax bill later, often without further planning having taken place.

Nomination Strategy Becomes Critical

After April 2027, pension nomination decisions carry much greater weight.

Key considerations include:

• Whether to nominate a spouse, children, or a combination
• The age and tax position of intended beneficiaries
• The size of the survivor's own estate
• The interaction with residence nil rate band taper

There is no universal answer. The correct approach depends on the wider estate structure.

Executor and Administration Risk

Including pensions in the inheritance tax calculation increases the burden on personal representatives.

Executors may need to:

• Identify and value multiple pension schemes
• Obtain information from providers under time pressure
• Fund inheritance tax before assets are accessible
• Manage increased personal liability for reporting accuracy

This is a material shift from the current position.

Planning Implications

The April 2027 changes turn pensions into a liquidity problem, not just a tax problem.

Common planning responses include:

• Reviewing pension nominations well in advance
• Reconsidering the traditional "spend everything else first" strategy
• Ensuring inheritance tax can be paid without forced pension withdrawals
• Providing certainty for executors and beneficiaries

For many families, this leads to consideration of insurance-based liquidity planning, structured outside the estate.

Why Accurate Modelling Matters

Many inheritance tax calculators and commentary still reflect the pre-2027 pension position.

Accurate modelling allows families to:

• See how pensions alter total estate exposure
• Understand interaction with residence nil rate band taper
• Assess whether planning action is proportionate and affordable