Calculators
Pensions in your estate calculator
From 6 April 2027 most unused pension funds will be counted for inheritance tax. See what that could mean for the people you plan to leave yours to.
What this means
How it works
Why pensions are being brought into the estate
Since 2015 a defined contribution pension has been one of the most efficient things to leave behind. It sat outside your estate, so no inheritance tax, and if you died before 75 your family could draw on it free of income tax as well. Many people arranged their retirement around that: spend the ISAs and savings, leave the pension alone.
For deaths on or after 6 April 2027 that changes. Most unused pension funds are added to the rest of the estate, and the total is tested against the same allowances as everything else: the £325,000 nil-rate band and, where a home passes to children or grandchildren, the £175,000 residence nil-rate band.
A worked example
Take an estate of £850,000 including a £500,000 home left to children, one person's allowances, and a £400,000 pension. Today the pension is ignored: £500,000 is covered by allowances and the remaining £350,000 is taxed at 40%, a bill of £140,000. From April 2027 the estate for tax purposes is £1,250,000, the taxable part is £750,000 and the bill is £300,000. The same family, the same assets, and £160,000 more tax.
Death after 75: two taxes on the same money
If you die at 75 or over, anyone inheriting the pension pays income tax at their own rate on what they take out. The legislation stops income tax being charged on the slice of the fund that went in inheritance tax, but the combined effect is still heavy. For a beneficiary paying 45% income tax, 40% inheritance tax followed by 45% on the remainder leaves just 33p in the pound.
What people are doing about it
- Reviewing the order in which they draw on pensions, ISAs and other savings.
- Making gifts from pension income, including regular gifts out of surplus income, which can be exempt immediately.
- Checking death benefit nominations, particularly where a spouse could inherit free of tax.
- Using life cover written in trust to meet a bill that cannot be planned away.
Each of those has tax consequences of its own. An adviser can model the options against your actual figures before you change anything.
Questions
Pensions and inheritance tax questions
What exactly changes on 6 April 2027?
For deaths on or after 6 April 2027, most unused pension funds and pension death benefits are included in the value of the estate for inheritance tax. Until then they normally sit outside it. The change was legislated in the Finance Act 2026.
Are any pension benefits left out?
Yes. Anything passing to a husband, wife or civil partner stays exempt, as do lump sums left to charity. Death-in-service benefits paid from a registered scheme are excluded, and so are dependants' scheme pensions and joint-life annuities.
Why can the tax on a pension be so high after 75?
If you die at 75 or older, your beneficiaries pay income tax at their own rate on what they draw from the pension, on top of any inheritance tax. The rules prevent income tax being charged on the part of the fund used to pay the inheritance tax, but the two together can still take more than half of a pension for a higher-rate or additional-rate taxpayer.
Who pays the inheritance tax on a pension?
Your personal representatives are responsible for reporting and paying it. They can pay from the rest of the estate, ask the pension scheme to pay its share directly to HMRC, or leave it to the beneficiaries to settle. Pension schemes must provide valuations to help them.
Will this affect the residence nil-rate band?
It can. The residence nil-rate band is withdrawn once an estate is worth more than £2 million, and pensions will count towards that test. An estate that sits just under £2 million today may cross the line once pensions are added.
Should I start spending my pension first?
For years the usual advice was to spend other savings first and leave the pension until last, because it sat outside the estate. That logic is weaker now, but the right order depends on your tax position, your age, your health and who you want to benefit. It is a decision to take with a regulated adviser rather than a rule of thumb.
April 2027 is close. Plans take time.
Book a complimentary video consultation with an FCA-regulated adviser who specialises in estate planning, and go through your figures together. No obligation.