Big Changes Are Coming to How Pensions Are Taxed at Death 

If you’ve been told your pension sits outside your estate for Inheritance Tax (IHT), that may no longer be the case come 2027. 
 
For several years, defined contribution (DC) pensions (e.g. personal pensions) have offered a powerful way to pass on wealth, often tax-free. But under new draft legislation published in July 2025, the UK government is preparing to change that from 6 April 2027. 
 
These changes could cost some families tens – even hundreds – of thousands in avoidable tax, unless action is taken early. If you’re planning to pass pension wealth to adult children or other non-exempt beneficiaries, now is the time to get informed and plan ahead. 

Who Needs to Pay Attention? 

This article is especially relevant if you: 

• Are over 60 with significant personal or workplace pensions 

• Have nominated adult children or others outside your spouse as beneficiaries 

• Haven’t reviewed your estate plan considering recent legislation changes 

• Want to preserve more of your legacy for future generations 

If that sounds like you, or someone you care about, read on. These reforms are not yet in force, but planning ahead could make a substantial difference. 

What’s Changing from April 2027? 

The government first signalled its intentions in the Autumn Budget 2024, and the July 2025 draft legislation has now clarified the detail. Key proposals include: 

• DC pensions and lump sum death benefits will be included in the deceased’s estate for IHT purposes 

• Personal representatives (typically executors) will be responsible for reporting and paying any IHT due – not pension scheme administrators 

• Defined benefit pensions, death-in-service, and joint life annuities are unaffected 

• Spouses, civil partners, and charities remain IHT exempt as beneficiaries 

Real-World Impact: A Quick Example 

Let’s say Anita, aged 74, has a personal pension worth £600,000, and plans to leave it to her two adult children. 
 
Today, that could potentially be passed on with no IHT – a key benefit of pensions in estate planning. 
 
Under the new rules, however, that entire sum would be included in her estate. If her estate exceeds the nil-rate bands, her children could face a £240,000 IHT bill just on the pension alone, unless strategic planning steps are taken beforehand. 
 
Worried this could be you? 
Book a no-obligation free consultation with one of our Chartered Financial Planners to understand how these rules might affect your legacy plans. 

The 4-Step IHT Process (From 2027) 

Before these changes come into force, it’s worth understanding how the proposed rules will work in practice. From 6 April 2027, personal representatives will become responsible for reporting and settling any IHT due on pension benefits. The process will follow four key steps: 

1. Valuation by Pension Scheme 
On notification of death, schemes must value and report pension benefits to the personal representatives within 4 weeks. 

2. Estate Assessment 
Personal representatives assess the full estate (including pension values) to determine if an IHT return is required. 

3. Tax Reporting 
If IHT is due, a return is submitted to HMRC, outlining tax owed from each pension pot. 

4. Payment of Tax 
• If the estate passes to a spouse, pension benefits may be released without delay 
• If IHT is due, beneficiaries can either: 
  – Instruct the scheme to pay HMRC directly 
  – Receive the funds and pay the tax themselves (which may also incur income tax if the deceased was over 75*) 
 
*HMRC has confirmed steps will be in place to avoid double taxation (both IHT and income tax) and refund any overpaid amounts where appropriate. 

Planning Considerations 

These changes represent more than a tweak in legislation – they mark a fundamental shift in how pensions interact with estate and tax planning. While the rules don’t take effect until 2027, the window for proactive planning is now. Here are the key areas to review with your financial planner: 

Reviewing your nominated beneficiaries 
Do your current pension nominations still reflect your wishes – and would they trigger IHT under the new rules? 

Considering estate liquidity 
Would your executors have access to sufficient cash to settle any IHT due? 

Using pensions efficiently 
Drawing down some pension income during your lifetime may become more attractive under the new rules. 

Alternative legacy planning 
You might explore whether trusts, lifetime gifting, or other structures could help achieve your goals with greater control and tax-efficiency. 

Final Thoughts: Planning Ahead is Key 

The inclusion of defined contribution pensions in the IHT net is one of the most substantial estate planning changes in recent years. 
 
While most estates with modest pensions or spousal beneficiaries may not be affected initially, those with larger pots need to start thinking now about how this fits into their overall legacy plan. 

Speak With a Chartered Financial Planner 

If you’re unsure how these upcoming changes could impact your estate or want clarity on what steps to take next, we’re here to help. 
 
Book a free online consultation with one of our Chartered Financial Planners to explore how these reforms may affect your Inheritance Tax and legacy strategy. 
 
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