Pensions have historically occupied a different place in estate planning from property, investments and other assets. That is about to change.
From 6 April 2027, most unused pension funds and pension death benefits will be brought within an individual’s estate for Inheritance Tax purposes. For people who have deliberately preserved pension wealth with the intention of passing it to the next generation, the assumptions underpinning that strategy may now need to be revisited.
The change itself has been known for some time, but we have been waiting for more clarity on how the new system will operate in practice when somebody dies.
HMRC’s Technical Note 2: Further information on Inheritance Tax and Pensions, published on 27 August 2026, provides important further detail following a recent update to the applicable regulations. It explains the information that will need to pass between personal representatives and pension schemes, how pension benefits can be temporarily withheld, how Inheritance Tax may be paid directly from pension funds and how personal representatives can ultimately obtain clearance from HMRC.
For families with significant pension wealth, it is an appropriate time to consider what the change means for their wider estate and succession planning.
At a glance: the April 2027 pension Inheritance Tax changes
| When do the rules change? | For deaths on or after 6 April 2027 |
| What is changing? | Most unused pension funds and pension death benefits will be brought into the deceased’s estate for IHT purposes. |
| Will every pension be affected? | No. Certain benefits, including death-in-service benefits from registered pension schemes and some dependant’s scheme pensions, remain outside the new regime. |
| Who will deal with the Inheritance Tax position? | Personal representatives will need to obtain information from pension schemes and factor pension wealth into the estate’s wider Inheritance Tax position. |
| What should individuals do now? | Review pension arrangements alongside Wills, other assets and wider succession planning before the new rules take effect. |
What is changing to Inheritance Tax on pensions from April 2027?
For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be treated as part of the deceased’s estate for Inheritance Tax purposes.
This represents a significant departure from the current treatment of many discretionary pension schemes, under which unused pension funds can generally sit outside the member’s estate for Inheritance Tax purposes.
Not every pension benefit will be brought within the new regime. Certain benefits will remain outside its scope, including death-in-service benefits payable from registered pension schemes and certain dependant’s scheme pensions.
The change does not mean that every pension will suffer Inheritance Tax. Pension wealth will instead form part of the wider calculation of the deceased’s estate, with the availability of exemptions, reliefs and nil-rate bands (NRBs) determining the ultimate tax position.
The standard Inheritance Tax nil-rate band is currently £325,000. A residence NRB of up to £175,000 may also be available where the relevant conditions are satisfied, although this begins to taper for estates worth more than £2 million.
Who will be affected by the new pension Inheritance Tax rules?
The changes are particularly relevant to individuals who have accumulated substantial pension wealth.
However, in some cases the impact may go beyond simply Inheritance Tax on the pension itself. Individuals whose estate is approaching the £2 million residence NRB taper threshold may also need to consider whether bringing pension wealth into the estate changes the availability of that allowance.
For example, take a married couple with assets in their estate (including their home) worth £2 million, and a pension of £1 million. If they leave everything to one another, and to their children on the second death, they would before the change have an Inheritance Tax liability of £400,000. However, once the pension is taken into account, they will have lost the residence NRB, and so the total Inheritance Tax liability will be £940,000 – an increase of £540,000.
How will pensions be valued and reported after death?
One of the biggest practical challenges created by the new regime is that pension assets and the rest of an estate will need to be considered together.
Personal representatives will need information about the deceased’s pension arrangements to establish the value of the estate and determine whether an Inheritance Tax account is required, and if so how much to report. They will also need to know who will benefit, in order to determine what exemptions might be available.
HMRC’s latest technical note sets out formal information-sharing requirements between personal representatives and pension scheme administrators.
Broadly, personal representatives will be able to request information including the value of what the legislation refers to as the deceased’s “notional pension property”. Pension schemes will generally have 28 days from receiving a valid request to provide the required information available to them. In a helpful change to the previous position, the latest regulations mean that a prospective personal representative (e.g. someone entitled to administer the estate on intestacy) is also entitled to request information.
However, if the pension scheme has not yet determined who will benefit from the pension, they are not required to report this until 14 days after the determination has been made. There is no specific deadline for the pension scheme to make this decision, which may delay the personal representatives being able to make an accurate Inheritance return.
The prompt identification of all of the deceased’s pension arrangements is therefore likely to become an increasingly important part of estate administration. Delays in identifying schemes, obtaining valuations or establishing beneficiaries could have knock-on consequences for the Inheritance Tax process.
Can Inheritance Tax be paid directly from a pension?
The new regime provides a mechanism known as the Pensions Direct Payment Scheme.
A valid payment notice can require a pension scheme administrator to pay Inheritance Tax, together with applicable interest, directly to HMRC from the relevant pension benefits.
Payment notices can be issued by personal representatives, someone acting on their behalf or pension beneficiaries. A beneficiary can only issue a notice in relation to their own Inheritance Tax liability and from pension benefits payable to them under that scheme. A prospective personal representative (for example, on an intestacy), while entitled to request information, is not entitled to issue a payment notice.
Once a valid payment notice has been received, the pension scheme administrator generally has 35 days to make the payment.
Where there is reason to believe that Inheritance Tax is or may be payable, a personal representative, prospective personal representative or someone acting on their behalf can issue a notice requiring the pension scheme administrator to withhold payments.
Broadly, the scheme can be required to withhold up to 50% of the relevant pension death benefit entitlement for up to 15 months after the end of the month in which the member died. However, withholding will not apply to excluded benefits or benefits passing to exempt beneficiaries. For example, where a surviving spouse or civil partner qualifies as an exempt beneficiary, their share should not be subject to withholding.
What happens if a pension is discovered after the estate has been administered?
Personal representatives can seek formal clearance from HMRC once the administration has reached an appropriate stage. Where clearance has been obtained, they may be discharged from personal liability for Inheritance Tax relating to pension benefits that are only discovered subsequently.
Personal representatives should only apply once the Inheritance Tax account and relevant schedules have been submitted, they believe all Inheritance Tax has been paid and estate values are considered final.
Where a previously unknown pension subsequently emerges after clearance, the pension beneficiary may instead become liable for the additional Inheritance Tax, although the personal representatives will still have reporting responsibilities.
Why the changes could alter existing estate-planning strategies
For many individuals, the existing tax treatment has encouraged a strategy of using other assets during retirement while preserving pension wealth for beneficiaries.
That strategy should not automatically be abandoned, but the assumption that preserving a pension until death will necessarily be the most tax-efficient succession strategy will need to be revisited.
For some individuals, the reforms may change the order in which different assets are used during retirement. For others, they may place greater emphasis on lifetime gifting or on how pension nominations interact with the wider estate plan.
Any planning needs to take into account the potential income tax consequences of receiving pension benefits, both for the pension holder themselves, if making withdrawals during their lifetime, as well as for beneficiaries where pension benefits are inherited. If potential beneficiaries are likely to pay different marginal rates of income tax, this might be something to take into account in deciding how to allocate different parts of an inheritance.
What should you do before April 2027?
There are still several months before the new rules take effect. For those likely to be affected, that provides a useful opportunity to review existing arrangements rather than waiting until April 2027.
1. Establish the value of your wider estate
Start by building an up-to-date picture of your overall position, including pension values, property, investments and other assets.
The significance of the pension changes cannot be assessed properly without understanding how the pension sits within the estate as a whole.
2. Review pension nominations alongside your Will
A pension nomination may remain important in determining who receives pension benefits, but the tax consequences of that decision may look different under the new regime.
Pension nominations should therefore be considered alongside the Will and wider succession plan rather than in isolation.
3. Model the potential Inheritance Tax position
For larger estates, comparing the expected Inheritance Tax position before and after 6 April 2027 can help identify how much additional exposure the reforms may create.
This may be particularly important where the estate is close to the £2 million residence nil-rate band taper threshold.
4. Assemble clear records
It will be important for your personal representatives to be able to promptly identify your pensions following death, in order to make contact with the relevant pension schemes. You can make this easier for them, and avoid the risk of pensions being overlooked, by ensuring that you have clear and up-to-date records available, in a format that will be accessible to them at the relevant time.
5. Avoid making pension withdrawals solely because of the Inheritance Tax changes
Taking money out of a pension can trigger Income Tax and may simply replace an asset within the pension with cash or investments that sit directly within the individual’s estate.
There is therefore no universal answer to whether someone should draw down pension wealth before April 2027. The appropriate strategy will depend on the individual’s circumstances.
How Quastels can help
The inclusion of pensions within the Inheritance Tax regime represents a significant change to the way many families will need to think about succession planning.
Our Private Wealth & Tax team can advise individuals and families on how the April 2027 pension reforms interact with their existing estate planning and can work together with your financial advisors to provide joined-up advice.
Reviewing the position before the new rules take effect can provide time to understand the potential exposure, model different outcomes and consider whether existing arrangements remain appropriate.
