Pensions and inheritance tax from April 2027: why your will may need updating before then

ATHILAW

4 hours ago

7 min read

From 6 April 2027, most unused pension funds and pension death benefits will count towards your estate for inheritance tax if you die on or after that date. Anything above your nil-rate bands can be taxed at 40%. This is already law under the Finance Act 2026, and your will may need updating to reflect who receives what and who pays the tax.

For years, many people have treated a pension as the last thing to spend, because it usually sat outside the estate. That is changing. If your will and your pension nominations were set up on that assumption, it is worth checking them now rather than after April.

What is changing on 6 April 2027?

HMRC’s technical note explains that the Finance Act 2026 received Royal Assent on 18 March 2026. It brings most unused pension funds and pension death benefits within the value of a deceased person’s estate for deaths on or after 6 April 2027. If the member dies before that date, the current rules apply, even if benefits are paid out afterwards.

Until now, many pensions have passed to beneficiaries at the trustees’ discretion, which kept them outside the estate. The new rules remove that distinction. Whether trustees have discretion no longer decides if the pension is in scope.

The Autumn Budget 2026 on 28 October did not change the April 2027 start date. It made technical adjustments, and it announced the removal of the two year rule that could make some tax-free death benefits taxable if they were paid late. That change applies to payments from 28 October 2026 and still needs legislation.

What is in scope and what is not

Not every pension payment on death will be taxed. The same technical note sets out the main exclusions and exemptions.

Benefit or beneficiary	Treatment from 6 April 2027
Unused defined contribution pension pot	In scope
Unused drawdown funds	In scope
Lump sum death benefits	In scope
Death in service benefits from a registered scheme	Excluded
Dependants’ scheme pensions	Excluded
Benefits passing to a spouse or civil partner	Exempt, subject to the usual conditions
Benefits passing to a qualifying charity	Exempt

Exempt does not mean ignored. The personal representatives still have to include the pension value in the estate account and claim the exemption, so the paperwork exists either way.

Will your pension be taxed at 40%?

Not automatically. The standard rate is 40%, but it only applies to the part of your estate above your tax-free thresholds. GOV.UK says there is normally no inheritance tax to pay if your estate is below £325,000, or if you leave everything above that to a spouse, civil partner or charity.

If you leave your home to your children or grandchildren, your threshold can rise to £500,000 when your estate is worth less than £2 million. Those thresholds are fixed until the end of the 2030 to 2031 tax year, so adding a pension to the estate pushes more families over them.

Here is a made up example. Maria is divorced. She leaves her home and savings, worth £700,000, to her two children, plus a pension pot of £300,000. She has the £325,000 nil-rate band and the £175,000 residence nil-rate band.

	Before 6 April 2027 rules	From 6 April 2027
Estate counted for inheritance tax	£700,000	£1,000,000
Tax-free allowances	£500,000	£500,000
Taxable amount	£200,000	£500,000
Inheritance tax at 40%	£80,000	£200,000

The extra £120,000 is simply 40% of the £300,000 pension. Your own figures will differ, and this ignores other reliefs, so treat it as an illustration of the mechanism only.

Income tax can still apply as well

Inheritance tax is separate from income tax on inherited pensions. HMRC’s technical note says that if the member dies under 75, benefits are usually tax-free for beneficiaries, subject to the lump sum and death benefit allowance. If the member was over 75, benefits are taxable at the beneficiary’s marginal rate.

To soften the overlap, the part of the benefits that corresponds to inheritance tax paid does not count towards the beneficiary’s taxable income. How that works depends on how the inheritance tax is paid. It is the type of detail where a financial adviser or accountant should be involved alongside your solicitor.

Why this affects your will

A will normally deals with assets you own personally. A pension usually passes through the scheme, based on the rules and any nomination you have made. So the will and the pension can point in different directions, and from April 2027 the tax bill for both lands in the same estate.

There are a few practical points to think about.

Who Pays The Tax On The Pension Share Of The Estate
Whether One Beneficiary Receives The Pension While Another Receives Property
Whether Your Executors Have The Cash To Pay The Tax Before Probate
Whether Your Pension Nomination Still Matches Your Will
Whether A Spouse Exemption Today Creates A Larger Estate For The Survivor Later

Take the second point. Suppose one child is nominated for the pension and the other inherits the house through the will. Depending on how the will is drafted, the tax on the pension might fall on the estate rather than the person who received the pension. That can leave the two children with very different outcomes. A clearly drafted will can say how the burden should be shared. Our wills and probate solicitors can review this with you.

Does changing your nomination avoid the tax?

No. From April 2027 the tax applies whether or not the pension trustees have discretion over who receives the funds. An expression of wish still matters for who gets the money, but it does not take the pension outside your estate. It is worth keeping up to date for that reason.

What your executors will have to do

The personal representatives, meaning your executors or administrators, will be responsible for reporting and paying any inheritance tax due on the pension. The beneficiary also becomes jointly liable once the pension is vested in them. According to HMRC’s technical note, they will need to contact each scheme, ask for a valuation, and find out how much is going to exempt and non-exempt beneficiaries.

A few process points from the guidance are worth knowing.

Inheritance Tax Is Due At The End Of The Sixth Month After Death
Schemes Should Provide Valuations Within 28 Days Of A Request
Executors Can Ask A Scheme To Withhold Up To 50% Of Taxable Benefits For Up To 15 Months
A Pensions Direct Payment Notice Can Be Used To Pay The Tax From The Pension Itself
The Minimum Value For A Direct Payment Notice Is £1,000

Those tools help where the estate has little cash. But they only work if the executors know which pensions exist. Keeping an up to date list of every scheme, with contact details, is one of the most useful things you can leave behind.

Should you spend your pension first?

It is tempting to conclude you should drain the pension to avoid the tax, but that is not always sensible. Withdrawals can create income tax, and moving money into other assets can create other problems. Decisions like that depend on your age, health, income needs and your family, and they belong with a regulated financial adviser.

What a solicitor can do is make sure your will, any trusts and your wider estate plan fit whatever you decide. If you have also thought about gifting, our conveyancing solicitors can handle a property transfer, but the 7 year rule means gifts need planning well in advance.

Think about decisions during your lifetime too

Planning is not only about what happens after death. If you lose the ability to make decisions, someone has to manage your finances, and that can include pension decisions. Having a lasting power of attorney in place means you choose who that is, rather than leaving it to a court process.

A short checklist before April 2027

Find Out What Pensions You Have And What They Are Worth
Check Who Is Named As Beneficiary On Each One
Read Your Will To See Whether It Mentions Pensions Or Inheritance Tax
Think About How Much Tax Might Be Due On The Whole Estate
Ask Whether Your Executors Would Need To Raise Cash Quickly
Speak To A Financial Adviser About Withdrawals Before Changing Anything

Frequently asked questions

Will pensions be subject to inheritance tax in 2027?

Yes, for deaths on or after 6 April 2027, most unused pension funds and death benefits will be included in the estate. Some benefits are excluded, and spouse, civil partner and charity exemptions continue to apply.

What happens if you die before 6 April 2027?

The current rules apply to that death. HMRC says this is the case even if the pension benefits are paid to beneficiaries after 6 April 2027.

Are death in service benefits caught?

No. Death in service benefits payable from a registered pension scheme are excluded from the estate for inheritance tax purposes.

Can you leave your pension to your spouse tax free?

Benefits passing to a spouse or civil partner are generally exempt, but the pension is still counted in the estate and the exemption has to be claimed. It is worth thinking about the second death too, when the survivor’s estate may be larger.

Do you need to change your will because of the pension rules?

Not always. But if your will was written on the basis that pensions sit outside your estate, or if it does not say how tax should be shared between beneficiaries, a review is sensible.

Review your will while there is time

April 2027 is not far away, and pension planning tends to take longer than people expect. A short review now can catch mismatches between your will, your pension nominations and your wider plans.

Athi Law is a family run firm with offices in Sheffield, Dronfield and West Bromwich. If you would like us to look at your will with the new rules in mind, contact our wills and probate team and bring details of your pensions with you.