New rules coming into effect from April 2027 will mean that unspent pensions will be included in the value of an estate for Inheritance Tax (IHT) calculations. This marks a significant change, as pensions were previously exempt from IHT and not counted towards estate value.
The alteration will affect unused defined contribution (DC) pensions, including funds in drawdown, but not payments from annuities. Lump sum death benefits from defined benefit (DB) pensions will also be included, though regular income paid to a spouse or civil partner from a DB pension will remain exempt.
The Office for Budget Responsibility (OBR) forecasts that the proportion of deaths triggering an IHT bill will increase from 5% in 2022-23 to 10% by the end of the decade. Government estimates suggest that in 2027-28, 10,500 estates that would not have previously owed tax will become liable, and an additional 38,500 estates will face an average extra bill of £34,000.
A June 2026 survey of Which? members indicated that 39% were concerned about the impending changes, with 25% believing the new rules would impact their estate planning. Some individuals are already adjusting their behaviour, with 20% of those affected by the new rules spending more of their retirement savings, and 58% planning to do so.
However, increased pension withdrawals during retirement to reduce estate value could lead to higher income tax liabilities, especially with income tax thresholds frozen until at least 2030-31. The personal allowance will remain at £12,570 and the higher-rate threshold at £50,270 until at least 2031.
Families may also face more complex processes when dealing with pensions after a death. HMRC guidance suggests pension schemes could withhold up to half of a beneficiary's pension death benefits while the tax position is determined. Good record-keeping and ensuring beneficiary nominations are up to date are advised.