Pension Funds and Inheritance Tax
Understanding how different pension types are treated for inheritance tax purposes and estate planning implications
Rule change from 6 April 2027
Most unused pension funds and death benefits will be included in the estate for Inheritance Tax (IHT) from 6 April 2027. Death-in-service (DIS) benefits remain out of scope of IHT.
Key Takeaways
- • Most pension funds are exempt from inheritance tax until 5 April 2027
- • From 6 April 2027, most unused pension funds will be within the estate for IHT
- • Death-in-service benefits remain outside IHT both before and after 6 April 2027
- • Complete nomination forms to guide benefit payments
Are pensions within IHT?
Until 5 April 2027, many pension death benefits typically sit outside the estate for IHT. From 6 April 2027, most unused pension funds and certain death benefits are within the deceased's estate for IHT purposes. Always check which benefits are paid, how, and to whom.
Death-in-service (DIS) benefits
DIS benefits from registered schemes remain outside the estate for IHT, both before and after 6 April 2027. Treatment for income tax (if any) is separate from IHT and depends on recipient circumstances.
Pension Types and Tax Treatment
No inheritance tax (until 5 April 2027) and no income tax for beneficiaries on pension benefits. Must be paid within 2 years of death.
No inheritance tax (until 5 April 2027), but beneficiaries pay income tax at their marginal rate on pension benefits received.
- • Under 75 at death: Pension death benefits are usually tax-free for the recipient if paid within the scheme's time limits.
- • 75 or over: Benefits are generally taxed as income at the recipient's marginal rate.
- Note: Income tax treatment is separate from IHT and may apply alongside IHT from April 2027.
From 6 April 2027: For deaths at age 75+, the same benefit may face IHT (on the estate) and income tax (on the recipient).
Reporting and paying IHT on pension death benefits
From 6 April 2027, new reporting and payment obligations apply to pension death benefits:
- • Personal representatives (PRs) generally handle reporting and payment for any IHT due on pension death benefits.
- • Once beneficiaries are appointed, they can be jointly and severally liable for the IHT attributable to benefits they receive.
- • Keep provider letters, benefit statements, and scheme rules to evidence what is included.
Forms reference: Use IHT409 (pensions) and IHT410 (life policies & annuities) with the main IHT400, even where no IHT ultimately falls due.
Quick scenarios
Usually outside IHT; check income-tax position (under/over 75).
Within the estate for IHT (subject to any spouse/civil partner exemption). Recipient may also face income tax if the deceased was 75+.
Out of scope for IHT both before and after 6 April 2027.
Check whether proceeds are payable to the estate (potentially within IHT) or in trust to beneficiaries (generally outside the estate).
Defined Contribution Pensions
Personal pensions, workplace pensions, and SIPPs follow the same inheritance tax rules. Until 5 April 2027, the pension fund remains outside your estate for inheritance tax purposes. From 6 April 2027, most unused funds will be included in the estate.
- • Pension fund value is not included in your estate (until 5 April 2027)
- • Beneficiaries can receive lump sums or continuing pension income
- • Scheme administrator has discretion over benefit payments
- • Complete expression of wish forms to guide decisions
- • Uncrystallised funds offer more tax-efficient inheritance (until 5 April 2027)
Defined Benefit Pensions
Final salary and career average schemes typically provide spouse's pensions and death-in-service benefits rather than lump sum transfers.
Estate Planning Strategies
Pensions remain valuable estate planning tools, though the rules are changing from 6 April 2027. Consider these strategies to maximize their benefits.
- • Review your pension strategy before 6 April 2027
- • Delay pension withdrawals to preserve inheritance tax benefits (until 5 April 2027)
- • Use other assets first to keep pension funds intact
- • Complete and regularly update nomination forms
- • Consider beneficiaries' income tax positions
- • Avoid pension recycling (taking benefits just to gift them)
- • Review strategy after major life events
Special Pension Types
Some pension arrangements have specific rules that affect inheritance tax treatment.
Dies with you - no inheritance tax implications as no benefits pass to beneficiaries.
Follow standard DC pension rules but with greater investment flexibility.