For years, an unused pension pot has been one of the most tax-efficient things a family could inherit. For deaths on or after 6 April 2027, that changes: most unused pension funds and death benefits will count as part of the estate for inheritance tax.
What is changing, and from when?
According to HMRC’s policy paper on the reform, the measure applies to deaths on or after 6 April 2027. Most unused pension funds and pension death benefits will be brought within the value of the deceased person’s estate. That applies whether or not the scheme administrator or trustees have discretion over who receives the benefits.
Until now, many pension death benefits sat outside the estate because they were paid at the discretion of trustees. The new approach removes that distinction for most benefits, so a pension pot is treated much like a bank balance or a property when the estate is valued. The standard inheritance tax rate remains 40%, according to GOV.UK, charged only on the part of an estate above the tax-free threshold of £325,000, which can rise to £500,000 where a home passes to direct descendants.
For the existing rules on lifetime gifts and reliefs that run alongside this change, see how the seven-year rule shapes gifting and what changed in April 2026.
What stays outside the net?
The reform is not total. HMRC says the following are excluded:
- Death in service benefits from registered pension schemes, whether the scheme is discretionary or non-discretionary.
- Dependants’ scheme pensions from defined benefit arrangements or collective money purchase arrangements.
The long-standing exemptions also remain. According to HMRC, the existing exemptions for death benefits passing to a surviving spouse or civil partner, and to registered charities, are maintained. In practice, a pension left to a spouse should still escape inheritance tax at that point; the question of tax arises when the pot, or what remains of it, passes on again.
Who has to report and pay?
An early proposal would have made pension scheme administrators responsible for the tax. After consultation, which ran from 30 October 2024 to 22 January 2025 and drew 649 written responses, the government decided against it. Personal representatives, the people already administering the rest of the estate, will be liable for reporting and paying inheritance tax on unused pension funds and death benefits.
According to the government’s summary of responses, the standard six-month payment deadline is unchanged, with late-payment interest accruing afterwards. Pension schemes must tell the personal representative the value of the pension within four weeks of receiving notice of the member’s death. Beneficiaries become jointly and severally liable from the point they are appointed, while the personal representatives’ own liability is limited to assets passing directly through the estate.
How does the 50% withholding rule work?
A practical problem is that the tax falls on the executors, but the money sits in the pension scheme. HMRC’s technical note describes a mechanism for this. A personal representative, or someone acting for them, can require the scheme administrator to withhold 50% of a beneficiary’s death benefit entitlement for up to 15 months after the end of the month in which the member died.
The notice ends on the earliest of withdrawal, payment of the tax and interest, or the 15-month limit. Excluded benefits and payments to exempt beneficiaries cannot be withheld. The scheme must confirm acceptance within 14 days and state the amount withheld within 28 days.
There is also a pensions direct payment route, under which the scheme pays tax to HMRC on the estate’s behalf. The technical note says it can be used only where the tax and interest being paid is at least £1,000; below that, the amount must be paid to HMRC from other sources.
What if a forgotten pension turns up later?
Pensions are easily lost across a long career, so the rules address late discoveries. According to HMRC’s technical note, personal representatives can be discharged from liability for tax on previously undiscovered pension benefits once they obtain HMRC clearance. Beneficiaries then become liable for the tax on those newly found benefits, and the personal representatives remain responsible for reporting them.
Clearance can be sought only after the inheritance tax account has been submitted, all tax is believed paid and estate values are believed final. It requires at least 12 months from the date of death and at least three months from receipt of the probate unique code, and is applied for on form IHT30. For families, the lesson is plain: a clear list of every pension, kept where executors can find it, is now part of estate administration. The wider pensions dashboards rollout is intended to make private pensions easier to trace.
A worked example with round numbers
The following is illustrative arithmetic, with all other reliefs ignored. Suppose someone dies after April 2027 leaving £600,000 of ordinary assets and an unused pension pot of £300,000, all to an adult child, with only the £325,000 threshold available.
| Scenario | Taxable estate | Tax at 40% |
|---|---|---|
| Pension outside the estate | £600,000 − £325,000 = £275,000 | £110,000 |
| Pension inside the estate | £900,000 − £325,000 = £575,000 | £230,000 |
| Difference | £300,000 | £120,000 |
The extra £120,000 is simply 40% of the £300,000 pension. Different facts change the result: a spouse exemption, a residence nil-rate band or a smaller estate could reduce or remove the bill. The point is the mechanism, not the figure.
Is income tax still due as well?
Potentially, yes. According to GOV.UK, income tax on inherited pension money depends on the member’s age at death. If the member died before 75, most lump sums are tax-free unless they exceed the deceased’s lump sum and death benefit allowance, and new-style drawdown or annuity income is tax-free. If the member died at 75 or over, most lump sums, annuities and drawdown payments have income tax deducted by the provider.
GOV.UK also notes that a lump sum paid more than two years after the provider is told of the death is taxed as income in full. GOV.UK’s current guidance on inherited pensions does not address whether any relief applies where both inheritance tax and income tax arise on the same pension money, so readers in that position should check the latest HMRC guidance rather than assume the answer.
How many families will be affected?
HMRC’s own estimates give a sense of scale. About 213,000 estates a year are expected to have inheritable pension wealth in 2027 to 2028. Around 10,500 of those would become liable for inheritance tax when they previously were not, and around 38,500 would pay more than before. The average liability is expected to rise by about £34,000. HMRC cautions that these are static estimates, which may overstate the effect, and the government’s summary of responses says fewer than 10% of estates are forecast to have an inheritance tax liability at all.
The Exchequer impact is projected at £710 million in 2027 to 2028, rising to £1,665 million by 2030 to 2031. That trajectory explains why the measure is regarded as a significant revenue raiser rather than a technical tidy-up.
What the change means for how families think about pensions
This section is analysis rather than reporting. The old logic was that pensions were the last pot to spend, because they passed on outside the estate. That logic is weakened, though not removed: the spouse exemption still applies, pensions retain income tax advantages during life, and the right balance between spending, gifting and holding a pension depends on health, income, family and other assets. Some households will revisit the order in which they draw on different assets, and the intestacy rules are a reminder that who inherits also depends on having the right paperwork in place, including nominations with pension schemes.
Because HMRC has said further secondary legislation and guidance will follow before April 2027, and describes its technical note as not being draft guidance, details may still move.
From tax-light inheritance to a planning question
Pensions are moving from the margins of estate planning to the middle of it. From 6 April 2027, most unused pots will count towards the 40% charge, personal representatives will carry the reporting burden, and a 50% withholding mechanism will help fund the bill. Spouses and charities keep their exemptions, and death in service benefits stay outside. The practical effect is to make clear records and early conversations more valuable than ever.
This article is general information, not personalised financial advice; rules and rates change, so check current guidance or speak to a qualified adviser.
Sources: GOV.UK; HM Revenue and Customs
