Your Pension Is About to Lose Its Inheritance Tax Shelter — What the 2027 Change Really Costs

For decades, a defined contribution pension has been one of the few effective ways to pass on wealth free of inheritance tax. That's ending. From 6 April 2027, most unused pension funds will be pulled into your taxable estate for the first time — and the numbers involved are larger than many people realise.

What's changing, in plain terms

From that date, most unused pension funds and pension death benefits under registered pension schemes will be brought into a deceased person's estate for inheritance tax purposes. This covers uncrystallised or residual pension funds that haven't yet been drawn down or annuitised. Where the combined value of your estate and pension pushes above the nil-rate band of £325,000, the excess — including pension money — is taxed at 40%. HM Treasury estimates the change will drag more than 10,000 additional estates into the IHT net in 2027/28 alone.

Not everything is caught: death-in-service lump sums, dependants' scheme pensions and charity lump sum death benefits remain exempt, so the structure of your specific pension and nomination matters as much as its size.

Running the numbers

Consider a saver who has built a £400,000 pension pot alongside a modest estate of £150,000. Before April 2027, the pension typically passes to beneficiaries free of IHT. After the change, if unused, the pension is added to the estate — pushing total assets to £550,000, some £225,000 above the nil-rate band, generating a potential IHT bill of roughly £90,000 at 40%. The exact figure depends on other reliefs like the residence nil-rate band and any spousal transfers, but the direction of travel is unambiguous: larger pension pots that used to sit outside the estate are now squarely inside it.

How this compares internationally

The contrast with Australia is instructive. Australia has no general inheritance or estate tax at all, but does tax superannuation death benefits paid to non-dependants — typically 15% tax on the taxable component, or 30% on any untaxed component, with benefits to dependants tax-free. That's a narrower, lower-rate tax aimed specifically at retirement savings, compared with the UK's broader 40% estate-wide approach once pensions are included.

What to consider before April 2027

• Get an up-to-date estimate of your combined estate and pension value to see whether you're likely to cross the nil-rate band once pensions are included.
• Review and update your pension's expression of wishes / nomination form — who receives the pot, and their relationship to you, affects how death-in-service and dependant exemptions apply.
• Consider whether drawing down more of your pension during your lifetime (rather than leaving it invested for later years) makes sense once its IHT shelter disappears — though this needs weighing carefully against your own income needs and drawdown tax.
• Speak to a regulated financial adviser about estate planning options such as gifting, trusts, or spousal transfers before the rules take effect, since retrospective planning after 2027 will be more limited.
• Don't make irreversible decisions based on early guidance — HMRC's detailed rules and any last-minute amendments are still being finalised ahead of the April 2027 start date.

Key Numbers

• Effective date: 6 April 2027
• IHT nil-rate band: £325,000
• IHT rate above threshold: 40%
• Extra estates affected (2027/28 est.): 10,000+
• Australia non-dependant super death benefit tax: 15–30%

Sources

• Wedlake Bell: Planning for major change — pension funds and IHT from 6 April 2027
• M&G: Inheritance Tax on unused pension funds and death benefits
• Green & Associates: Superannuation Death Benefit Tax
• Legal Consolidated: Superannuation Death Tax

Educational content only — not financial advice.