If you have been treating your pension as money to leave to your family, the forthcoming Inheritance Tax changes are a good reason to review your plans. The aim is to understand the whole picture: your retirement needs, your family and the paperwork that records your wishes.
What is changing, and when?
For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be included when calculating the value of an estate for Inheritance Tax. The core reform was legislated for in Finance Act 2026. If someone passes away before that date, the previous rules apply even if benefits are paid later.
This does not mean every pension will face a 40% tax charge. Whether tax is payable depends on the estate, available allowances, exemptions and the benefits concerned.
Which benefits are excluded?
The government has confirmed exclusions including death-in-service benefits paid from registered pension schemes and certain dependant’s scheme pensions from defined benefit or collective money purchase arrangements. Ask the pension provider to identify the actual type of benefit; a familiar product name alone may not answer the tax question.
Why could this affect a family that did not expect an inheritance tax bill?
A pension that previously sat outside the Inheritance Tax calculation may increase the total counted estate. The standard nil-rate band is £325,000. Additional relief can be available where a qualifying home passes to direct descendants, and unused allowances may be transferable between spouses or civil partners, subject to the rules.
Transfers to a spouse or civil partner and qualifying charities can be exempt. Families should check the applicable conditions rather than assume that a headline allowance applies in full.
A simple illustration
Suppose someone has £300,000 of other assets and a £200,000 pension within the new rules. Assume there are no debts, lifetime gifts, spouse exemption, residence allowance or other reliefs, and that the whole £325,000 standard band is available.
The amount considered would be £500,000. The £175,000 above the assumed allowance would produce £70,000 of Inheritance Tax at 40%. This is a simplified illustration of the combined estate calculation, not a quotation of the tax payable by a particular family or pension beneficiary. Different allowances, exemptions and asset arrangements can change the result substantially.
Who will deal with the reporting?
Personal representatives will be responsible for reporting and paying Inheritance Tax relating to pension benefits within scope. The arrangements include mechanisms for pension administrators to withhold benefits and pay tax directly, subject to conditions. Executors will need good records of pension providers as well as banks and property.
What did Budget 2026 add?
The government announced further technical legislation for 6 April 2027, including allowing prospective personal representatives to direct tax payments in specified circumstances and flexibility in how pension property is grouped when calculating the reduced Inheritance Tax rate for charitable giving.
It also announced removal of the pension death-benefit two-year Income Tax rule for relevant payments from 28 October 2026, through Finance Bill 2026–27. This is separate from the Inheritance Tax reform. HMRC’s May 2026 technical note expressly says it does not incorporate Budget 2026 changes, so it should be read alongside the newer announcements.
Does this replace Income Tax on inherited pensions?
No. Income Tax is a separate question and depends on matters such as the benefit type and the member’s age at death. The reforms provide for adjustments where the beneficiary bears Inheritance Tax, so simply adding two headline tax rates together can give a misleading answer. Obtain an individual calculation before making decisions.
Practical steps to take now
- List your pensions and keep provider details with your estate-planning records.
- Review the people named on your pension nomination or expression-of-wish forms with your provider.
- Review your Will, executors and any trusts alongside your pension arrangements.
- Ask an appropriately qualified financial adviser to assess retirement income and pension options, with tax advice where needed.
- Avoid withdrawing or giving away pension money solely in response to a headline. Consider your own future security and all tax consequences first.
How Nene Legal can help
Nene Legal can help review your Will and estate-planning wishes so the documents reflect your family. Pension investment, withdrawal and transfer recommendations should come from an appropriately authorised financial adviser.
For a relaxed discussion and free home visits across Northamptonshire, call 01933 588 990 or visit Nene Legal.
Official sources
- HMRC: pension Inheritance Tax technical note, May 2026
- HMRC: unused pension funds and death benefits
- Budget 2026: overview of tax legislation and rates
- Budget 2026 announcements
- GOV.UK: Inheritance Tax allowances and rules
Checked 10 November 2026. General information, not personalised tax or regulated financial advice. The core April 2027 reform is legislated; additional Budget measures and implementation guidance should be checked as they develop. Safer Wills Limited trading as Nene Legal.
