Is my pension affected by Inheritance Tax?
Inheritance Tax (IHT) can feel worrying, but understanding how it applies to your estate – and your pension – can make things much clearer. Let’s keep it simple.
What Is Inheritance Tax?
Inheritance Tax is a tax on your estate when you die. Your estate includes:
Property
Money
Belongings
(minus any debts)
You don’t always pay IHT. You’re usually exempt if:
The total value of your estate is below £325,000 (the “nil-rate band”), or
You’re married or in a civil partnership and leave everything above the threshold to your spouse/civil partner, or
You leave everything above the threshold to an exempt beneficiary, such as a charity or certain community organisations.
If your estate is above the threshold and not covered by exemptions, the excess can be taxed at 40%, which can lead to a substantial tax bill.
Pensions and Inheritance Tax – How It Works Now
Here’s the good news: right now, pensions are generally treated differently from other investments.
For most people, defined contribution pensions (like those offered by Penny) are not counted as part of your taxable estate for IHT purposes.
This makes pensions a tax-efficient way to pass on money to loved ones.
What happens to your pension when you die?
If you have a defined contribution pension, your remaining pot can usually be passed to your chosen beneficiaries.
You tell your provider who you’d like to receive your pension by completing a beneficiary nomination (sometimes called an “expression of wish”).
Tax treatment currently depends on your age when you die:
If you die before age 75: Your beneficiaries can usually take money from your pension tax-free (if paid within two years of your provider being told of your death).
If you die at age 75 or older: Your pension is still usually outside IHT, but your beneficiaries pay income tax at their normal rate on any withdrawals they make.
Important Change from April 2027: IHT on Unused Pensions
This is where things are changing.
The Finance Act 2026 provides that, from 6 April 2027, most unused pension funds and pension death benefits will be included in the estate for Inheritance Tax purposes. The result will depend on the type of benefit and any exemption or exclusion that applies.
In simple terms, from 6 April 2027:
Most unused pension funds and pension death benefits will generally be included when working out the estate’s Inheritance Tax liability.
Any tax is calculated using the estate’s available thresholds, rates and exemptions; not every pension benefit will create a 40% charge.
Personal representatives will report pension amounts and are generally responsible for paying any Inheritance Tax due from the estate. Pension schemes must provide information and may support payment in some cases.
The spouse or civil partner exemption continues to apply where its conditions are met.
Death-in-service benefits from registered pension schemes are outside the new pension measure.
Charity exemptions and other existing exemptions continue to apply, and the legislation includes further technical exclusions.
The government estimates that:
Around 10,500 estates (about 1.5% of deaths) that previously wouldn’t have paid IHT will now start to pay it, and
Around 38,500 estates will pay more IHT than they would have under the old rules.
The change is now law in the Finance Act 2026. HMRC will publish further secondary legislation, guidance and supporting material before 6 April 2027, so check the detail again before making estate-planning decisions.
What This Means for You
You don’t need to panic, but it is a good idea to plan ahead. In particular, you may want to:
Review your beneficiary nominations: Check that the people named still match your wishes. The tax result depends on who receives the benefit and the exemptions available, so do not change nominations for tax reasons without suitable advice.
Consider taking financial advice: A financial planner can help you think through your estate planning and retirement spending strategy, especially if you have a larger pension pot or other assets.
Keep informed: As HMRC guidance and tools are released, revisit your plans to make sure they still make sense.
How Penny Can Help
At Penny, we offer defined contribution pensions and can help you:
Find and consolidate your old pensions into one easy-to-manage account
Update your beneficiary nominations so the right people are named to receive your pension when you die
Understand, in plain language, how changes to pension tax and IHT might affect your retirement planning
Pensions remain a powerful way to save for the future and support your loved ones. By understanding the rules – especially the changes coming in from April 2027 – you can make more informed decisions about both your retirement and your estate.
Please note that tax rules are subject to change and their impact will depend on your personal circumstances.
