Pensions and Inheritance Tax: What HMRC's New Rules Mean for Your Family from 2027
HMRC has published the detailed rulebook for bringing pensions into inheritance tax from April 2027, including a 50% "withholding" power for executors and payment deadlines that catch families off guard. here's what it means for anyone planning to leave a pension behind.
Why the pension you're not spending might cost your family more than you think
If part of your retirement plan has always been "leave the pension until last, because it passes to the kids tax-free", it's worth sitting down, because that assumption is about to change.
On 27 August, HMRC published the second technical note setting out exactly how inheritance tax on pensions will work from 6 April 2027. This isn't new policy. It was first announced back in the Autumn 2024 Budget but until now, the detail of how it would actually be administered has been vague. That detail has just landed, and it's more involved than most people expect.
Here's the plain-English version. From April 2027, most unused pension funds - money still sitting in a defined contribution pot, or drawdown funds not yet spent will count as part of your estate for inheritance tax, in the same way your house or savings already do. Spouses, civil partners and charities remain exempt, as do death-in-service payments and dependants' pensions. But for anyone else inheriting; adult children, most commonly the pension is now in scope.
The mechanics matter here, because they're clunky. Executors can ask the pension scheme to withhold up to 50% of the death benefit for up to 15 months while the tax bill is worked out. Pension schemes can also be told to pay HMRC directly out of the fund, with 35 days to comply. And critically, inheritance tax has to be paid within six months of death there's no instalment option for the pension portion, even though a pension isn't always something you can quickly turn into cash. That's a real timing squeeze for families already dealing with probate.
What this means in practice?
If you're planning to leave a meaningful pension to your children, it's worth checking who you've actually nominated. An out-of-date "expression of wishes" form, or one that doesn't talk to your Will, can mean confusion and delay right when your family needs neither. This is a good year to check both are pointing in the same direction.
If your estate is anywhere near £2 million, the pension now counts toward that figure too. Pension value is included when testing whether you lose the Residence Nil Rate Band. So a pension that seems modest on its own could still be the thing that tips a wider estate into losing valuable allowances. It's the total picture that matters, not each account in isolation.
If you were planning to die with the pension largely untouched, and you're over 75, look at the combined effect carefully. Inheritance tax on the fund, followed by income tax when your beneficiary draws it out, can combine to a genuinely eye-watering rate in the worst cases. That doesn't mean spend recklessly but it does mean the old default of "spend other assets first, leave the pension till last" deserves a proper second look rather than being followed on autopilot.
One question worth asking
"If I died tomorrow, do my pension nomination, my Will, and my family's understanding of my wishes all tell the same story and does my estate have the liquidity to cover an inheritance tax bill within six months?" Most people have never had to think about their pension and their Will as one connected decision. From 2027, they are.
Why this matters beyond the numbers
We'd file this one under Gratitude & Happiness as much as Wealth. A pension isn't just a number on a statement. For a lot of people, it's the last practical way of saying "I looked after you" to the people they love. The point of planning around this isn't to outsmart HMRC; it's to make sure that intention actually arrives the way you meant it to, without unnecessary tax, delay or confusion landing on your family at the worst possible time.
We've got seven months before this takes effect, which is plenty of time to plan calmly rather than scramble later. If you'd like to talk through what it means for your own pension and estate, we're always happy to have that conversation no pressure, just a chat about what makes sense for you and your family.
This article is for general information purposes only and does not constitute personal financial, tax, or estate planning advice. Tax treatment depends on individual circumstances and may change in the future, and further HMRC guidance on this regime is still expected.