Short Answer – They’re going to charge IHT against unused pension pots, but it’s worse than that. The executors pay all the IHT, even the IHT payable by the Pension Company which the executors do not have control over. There is a notice procedure to stop distributions and some protection for lost pension funds also. But it’s not great news, unless you’re thrilled at people paying lots more tax.
Table of Contents
IHT on Pensions: Your Complete Guide to the 2027 Changes
Link to the statute which creates the Pension Pot IHT charge – https://www.legislation.gov.uk/ukpga/2026/11/enacted
What are the major IHT on pensions changes coming in April 2027?
These IHT changes are going to push a lot of people who currently do not pay IHT into the tax regime, particularly those with valuable pension pots.
From 6 April 2027, unused pension pots and most pension death benefits will be brought into the Inheritance Tax (IHT) regime in the UK. Previously, most defined contribution pensions (such as SIPPs SASSs, personal pensions, and workplace schemes) sat outside your estate for IHT purposes. Now, the value of any unused funds at death will be added to your personal estate and potentially taxed at 40% if your total estate exceeds the nil-rate band (£325,000, or up to £500,000 with the residence nil-rate band).
This represents one of the biggest shifts in estate planning for decades. The change applies to deaths on or after 6 April 2027 and covers SASS, final salary scheme lump sums where relevant, and remaining drawdown funds.
Why is the government introducing IHT on pensions?
The policy aims to raise revenue from larger pension pots that were previously exempt. It removes the previous advantage where pensions could be used as an efficient way to pass wealth without IHT. Most estates will still face no IHT, but those with combined assets (property, savings, and pensions) over the thresholds will now pay more.
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Will my pension pot be added to my estate for IHT?
Yes. The value of unused pension funds at the date of death will be included in your estate valuation. This applies regardless of whether the pension is in drawdown or uncrystallised. Exemptions remain for payments to a surviving spouse/civil partner or to a registered charity.
Who is liable for paying IHT on the pension – the executors or the pension scheme?
Executors (personal representatives) become personally liable for the IHT due on the pension pot. The pension scheme administrator (PSA) is not liable for paying the tax but can still distribute funds to nominated beneficiaries. This creates a significant risk for executors, especially if beneficiaries of the pension differ from those of the will or intestacy. The pensions beneficiaries will receive untaxed money and the estate will have to pay the tax with no easy means to recover the loss.
I may as well point out the obvious Human Rights Act challenge to making the PR’s personally liable for taxes on Pensionable assets which they have no legal title or control over. Someone is going to bring this up if they haven’t already. It needs looking at.
What happens if there isn’t enough cash in the estate to pay IHT on the pension?
This is one of the most onerous aspects. If there is cash in the pension pot, this can be used to pay IHT immediately (and avoid interest which starts at 4% above the bank rate after six months). If the pension asset is not liquid i.e. meaning it is land or some other asset, those assets must be sold to meet the IHT liability. Executors may face a shortfall and could be pursued by HMRC against their own personal assets. They cannot easily force the pension scheme to pay the tax before distribution. This mismatch between control of assets and tax liability is a major concern for many families.
No word as yet on a Human Rights Act claim to stop this nonesense – but you can hope!
Is there a notice procedure to protect executors?
Yes. Once it becomes clear that IHT is due, executors can serve a notice on the pension scheme administrator directing them to withhold up to 50% of taxable benefit distributions for 15 months. This provides time to finalise the IHT calculation, pay HMRC, and potentially obtain a grant of probate. Details on exact timing (from death or notice) are still being clarified in guidance.
What about pensions that executors don’t know about?
This is a real practical problem. There is no central register of all pensions, making it hard for executors to identify every pot quickly. If a pension is discovered after IHT has been paid, executors may still need to report it. Relief from liability may apply for late-discovered pensions, but additional tax (and potential loss of reliefs like taper or charity exemptions) could still be due. Thorough documentation during lifetime is now essential.
How are unmarried couples affected by IHT on pensions?
Unmarried partners (cohabitees) will be particularly impacted. They often nominate each other as beneficiaries for pensions, but they cannot benefit from the spouse/civil partner IHT exemption. This means the pension value could trigger or increase a 40% IHT bill, unlike married couples.
Is there any loss relief if the pension value falls after death?
No. IHT is calculated on the value at the date of death. Unlike property (where you can sometimes use a lower sale value within four years for relief), there is no loss relief on pension pots even if markets decline post-death. This has been described as particularly unfair by many commentators.
Will taper relief and other IHT allowances be affected?
Yes. [editor’s note on taper relief – there are three kinds of relief, some are informally called ‘taper’ and it’s easy to confuse them] If the estate exceeds £2 million. It also interacts with the residence nil-rate band and other allowances. Professional advice on trust structures and gifting strategies is now more important.
What should I do to prepare for these IHT on pensions changes?
- Trace and fully document all your pensions, including provider details, values, and nomination forms.
- Keep a central record of digital assets, passwords, and financial information.
- Obtain professional valuations for significant assets for probate purposes.
- Review and update your will and estate plan immediately.
- Consider lifetime gifts (which fall out of IHT after 7 years), life assurance in trust, or annuities to create liquidity.
- Use discretionary trusts and available nil-rate bands more strategically – wording in wills and deeds matters greatly.
Can I still use pensions for inheritance planning after 2027?
Yes, but the strategy changes. Spousal bypass trusts or other structures may become more relevant on the first death. Naming charities as beneficiaries can still provide IHT relief. Overall, pensions lose some of their previous IHT efficiency, so balancing income needs in retirement with estate planning is key.
What about defined benefit (final salary) pensions?
Most changes target defined contribution pots. However, certain lump sums or death benefits from final salary schemes may also be caught depending on the rules. Death-in-service benefits are generally excluded from the new IHT rules but you need to check back in 2027.
How do I find all my old pensions?
Use the government’s Pension Tracing Service, check old payslips, and contact previous employers. A specialist genealogist or probate researcher can help executors track down unknown pots. Starting this process now saves huge stress later.
Should I take financial or legal advice before 2027?
Absolutely, both. These changes make early estate planning reviews essential, especially for those with estates near or above £325,000–£500,000 when pensions are included. Small adjustments now (gifting, trust planning, or pension drawdown strategies) can save tens of thousands in tax.
Conclusion: Act now on IHT on pensions
The April 2027 changes end decades of IHT exemption for unused pension wealth. Executors face new personal liabilities, families with large pots or unmarried partners face higher bills, and planning complexity increases. By tracing pensions, updating wills, and seeking professional advice today, you can mitigate the impact and protect your loved ones.