Financial planning insight
Budget 2026: How Inheritance Tax on Pensions Will Change
If you have built up pension savings over your working life, you may have assumed that any money left in your pension when you die can pass to your family outside your estate for Inheritance Tax purposes. From 6 April 2027, that position will change for most unused pension funds and pension death benefits.
The reform was originally announced at the Autumn Budget 2024 and has since been legislated for in the Finance Act 2026. It is therefore an existing planned change to the tax rules, rather than a new measure. The change could affect how families plan for retirement, manage their wealth and pass assets to the next generation.
Understanding the new rules now can help you review your pension arrangements as part of your wider financial plan.
What does Budget 2026 mean for Inheritance Tax on pensions?
The key change is that most unused pension funds and pension death benefits will be included when calculating the value of a person's estate for Inheritance Tax purposes from 6 April 2027.
Previously, many defined contribution pensions could be passed to beneficiaries without being included in the deceased person's estate for Inheritance Tax. This made pensions an important consideration for people planning how to pass on wealth.
Under the new rules, unused pension savings could increase the value of an estate above the available Inheritance Tax thresholds. This does not mean every pension holder's family will pay more tax. The final liability depends on the value of the estate, available allowances, exemptions and the circumstances of the beneficiaries.
The Government's stated aim is to make the treatment of inherited pension wealth more consistent with other assets. The changes are particularly relevant to people who have substantial pension savings and expect to leave some of their funds untouched.
How will Inheritance Tax on pensions change in April 2027?
The following table summarises the main difference between the existing position and the planned rules.
Area | Current position | From 6 April 2027 |
|---|---|---|
Unused pension funds | Many unused funds in discretionary pension schemes are outside the estate for Inheritance Tax purposes. | Most unused pension funds will be included in the estate's value. |
Pension death benefits | Treatment depends on the type of scheme and benefit. | Most pension death benefits will fall within the new rules. |
Death in service benefits | Treatment depends on the scheme and how the benefit is provided. | Death in service benefits payable from registered pension schemes will be excluded from the estate for Inheritance Tax purposes. |
Responsibility for administering the estate's tax | Personal representatives already handle Inheritance Tax reporting for the estate. | Personal representatives will be responsible for reporting and paying any Inheritance Tax due on unused pension funds and relevant death benefits. |
These changes are set out in the Government's Inheritance Tax policy on unused pension funds and death benefits. The rules contain specific exclusions, so individual pension arrangements should be checked rather than assuming every benefit will be treated identically.
Will my family pay Inheritance Tax on my pension?
Possibly, but the change does not mean every inherited pension will automatically incur Inheritance Tax. The pension value will generally be considered alongside the other assets in the estate, and the tax due will depend on the overall position.
For most estates, the standard Inheritance Tax threshold is £325,000. Other allowances may be available, including the residence nil-rate band where the relevant conditions are met. The amount available can depend on factors such as marital status, previous transfers and the value and composition of the estate.
For example, someone with substantial property, investments and unused pension savings may find that including their pension pushes their estate above the available tax-free thresholds. Another person with a smaller estate may remain below the relevant limits.
The important step is to assess the pension alongside the rest of your estate, rather than considering it in isolation.
Should I change my pension withdrawals before the new rules apply?
Not automatically. Taking money out of a pension simply to reduce the amount left behind could create other tax consequences and may leave you with less money to fund your own retirement.
Pension withdrawals can be subject to Income Tax, depending on the type of payment and your circumstances. Once withdrawn, money may also become part of your estate if it is held in cash, investments or other assets when you die.
The decision therefore involves balancing your retirement income needs against your inheritance objectives. If you rely on your pension to maintain your lifestyle, taking more money out than necessary could undermine your financial security.
Before changing your withdrawal strategy, consider how much income you need, the tax implications of withdrawals and how the money would be used or invested afterwards. The GOV.UK guidance on tax when inheriting a private pension also explains that Income Tax treatment for beneficiaries can depend on the type of pension payment and the age at which the original pension holder died. Inheritance Tax and Income Tax are separate considerations, although the rules can interact.
What should pension holders do now?
The period before April 2027 provides an opportunity to review your financial plans and understand how the new rules could affect your family.
Start by identifying your pension arrangements and estimating the value of your unused pension savings alongside your property, investments, savings and other assets. Check which allowances and exemptions may be relevant to your circumstances.
It is also worth reviewing your nominated pension beneficiaries and making sure your pension providers hold up-to-date information. Although beneficiary nominations do not remove potential Inheritance Tax liability under the new rules, they remain important to ensure your pension benefits are directed in line with your wishes and scheme rules.
For more complex estates, pension planning should be considered alongside wills, lifetime gifting, investment arrangements and other estate planning decisions. The most suitable approach will depend on your financial circumstances, family needs and retirement plans.
At Castle Stonebridge Financial Planning, our Independent Financial Advisers can help you review your pensions as part of your wider financial position. A review can help you understand the potential effect of the changes and consider whether your existing arrangements remain suitable.
Plan ahead for the Inheritance Tax changes
The inclusion of most unused pension funds in estates from April 2027 is an important change for people who intend to pass pension wealth to their families. However, the effect will vary considerably between households, and it is not a reason to make rushed decisions about withdrawals or retirement income.
Understanding how your pension fits into your overall estate is the best starting point. If you have substantial pension savings or are concerned about the amount your family could inherit, consider speaking to our Independent Financial Advisers at Castle Stonebridge Financial Planning to review your options.
Disclaimer* The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.