The UK just confirmed pension pots will be hit by Inheritance Tax – Here’s what it means for your money
In a significant shift to long-standing pension rules, the UK government has locked in major changes to how unused pension funds are treated for inheritance tax (IHT) purposes.
The Finance Act 2026 received Royal Assent on 18 March 2026, confirming that most unused pension pots and death benefits will be included in a deceased person’s estate for IHT calculations starting from 6 April 2027.
This overhaul, first announced in the Autumn Budget 2024 and refined through consultations, ends the previous exemption that allowed many defined contribution (DC) pensions – such as SIPPs and workplace money purchase schemes – to pass to heirs free of IHT.
Previously, these funds often escaped the 40% IHT charge because death benefits were typically paid at the discretion of the pension scheme administrator.
From April 2027, for deaths occurring on or after that date:
- Unused pension funds will be valued as part of the deceased’s estate immediately before death.
- Lump-sum death benefits will generally be included in the estate.
- The standard IHT rate of up to 40% will apply if the total estate exceeds the available thresholds.
The government estimates this will affect a minority of estates – around 10,500 cases annually where IHT becomes due for the first time due to pension assets, and about 38,500 where the bill increases, representing roughly 1.5% of UK deaths when including behavioural adjustments.
Exemptions remain in place for certain cases, including:
- Death-in-service benefits paid from registered pension schemes.
- Lump sums paid to charities.
- Some defined benefit (DB) scheme arrangements may have partial protections, though most focus is on DC pensions.
“The Royal Assent of the Finance Bill confirms beyond doubt that inheritance tax on pensions is happening, with unused pension funds set to fall fully within the scope of inheritance tax from April 2027. This represents one of the most significant changes to pension taxation in a decade and fundamentally alters long‑standing estate planning strategies,” said Adam Cole, retirement specialist at Quilter.
“We have consistently highlighted that the government’s current approach risks creating significant complexity and administrative burden for grieving families, who could face lengthy delays as personal representatives gather valuations, submit forms and settle IHT on pension assets alongside the rest of the estate.
“These proposals mean the process at death is likely to become more complex, with delays also anticipated in payments to non-exempt beneficiaries.”
