Death in Service Escapes the 2027 Pension IHT Change

Your death in service benefit is not caught by the new pension inheritance tax rules. The change that takes effect from April 2027 brings unused pension funds into your estate for inheritance tax, and that has understandably worried a lot of people. But the government has confirmed that death in service benefits paid from a registered pension scheme are excluded from it. So the lump sum your employer's scheme would pay your family stays outside your estate, exactly as it does now.

This matters because "pension" is being used loosely in the headlines, and death in service benefits are often paid through a pension scheme's structure even though they behave nothing like a pension pot. The distinction the new rules draw is not between employers and individuals, or between one scheme and another. It is between a death benefit, which is being left out, and an unused pension fund sitting in your name when you die, which is being brought in.

If you have only ever thought of these as one thing, the split is worth understanding properly, because it changes which part of what you leave behind your family can rely on landing whole, and which part may now come with a tax bill attached.

The short answer: your death in service is being left out

The government announced at the 2024 Autumn Budget that, from 6 April 2027, most unused pension funds and pension death benefits would be included in the value of a person's estate when inheritance tax is worked out. That was the change that generated the alarm.

Following a consultation, the government then confirmed that death in service benefits payable from registered pension schemes would be excluded from the new treatment. In plain terms: the tax-free lump sum a typical employer scheme pays out when an employee dies in service is being kept outside the estate. It is not being dragged into inheritance tax by these rules.

Source: HM Revenue & Customs and HM Treasury, Inheritance Tax on pensions: liability, reporting and payment, on the changes to the treatment of pension funds and death benefits from 6 April 2027, published under the Open Government Licence v3.0.

So if your worry was that the money your family would receive from your job if you died is about to be taxed, you can set that worry down. The part of the pension world that is changing is a different part, and it is worth being precise about which.

What changes in April 2027

From 6 April 2027, unused pension funds and certain lump sum death benefits are expected to be brought into the estate for inheritance tax. That means the money left in a defined contribution pension pot you had not yet spent, which until now has usually passed to your beneficiaries outside your estate, can be counted alongside your house, your savings and everything else you leave.

Inheritance tax is charged at 40% on the value of an estate above the tax-free threshold, which is £325,000 for most people, known as the nil-rate band. An additional residence allowance can apply where a home passes to direct descendants. Anything left to a spouse or civil partner is normally exempt.

Source: HM Revenue & Customs, How Inheritance Tax works: thresholds, rules and allowances, published under the Open Government Licence v3.0.

There is also a practical change in who deals with it. The responsibility for reporting and paying any inheritance tax due on pension funds is expected to fall on the personal representatives of the estate, the people administering it, rather than on the pension scheme. That has consequences for timing and for who has to find the money, which we come to below. The mechanics of an unused pot moving into the taxable estate are set out in full in how an unused pension pot is heading into the taxable estate.

The distinction that decides it: death benefit or unused pension

Everything turns on which of two things the money is, so it is worth being able to tell them apart.

A death in service benefit is a lump sum an employer's scheme pays because you died while employed. It is a multiple of salary, it exists only while you are in the job, and it is paid through a discretionary trust to the people you nominated. It is not a pot of your own money. You never had it, you could not have drawn on it, and it disappears the day you leave the employer. This is the thing being excluded from the 2027 change.

An unused pension fund is your own accumulated retirement money that you had not yet spent when you died. It is an asset that belonged to you. This is the thing being brought into scope.

The confusion is understandable, because both can be administered under a registered pension scheme and both can pay out on death. But their tax fate from April 2027 is opposite. If you want to check that the money your household counts on is the excluded kind and not the caught kind, the simplest test is to ask whether it is a benefit paid because of your job, or a balance that is yours. The same excluded treatment extends to certain scheme survivors' pensions, which we look at in why a dependant's scheme pension is not caught by the 2027 rule.

Why this should change what your family actually relies on

For most families with a surviving spouse or civil partner, the immediate inheritance tax exposure is limited, because transfers between spouses and civil partners are normally exempt. The problem is sharper in two situations, and both are common.

The first is where significant money is passing to someone who is not a spouse or civil partner: children, a sibling, or an unmarried partner. There the nil-rate band can be used up quickly once a pension pot is added to a house, and 40% can apply to the excess. The second is where the estate is asset-rich but cash-poor, a house and a pension but little in the bank, so that a tax bill lands with no easy way to pay it except by selling something.

This is why the exclusion of death in service matters as more than a technicality. A death in service lump sum, and a personal life policy written in trust, both land outside the estate and both arrive quickly. If a family is going to face an inheritance tax bill on a pension pot, money that sits outside the estate is exactly what can be used to pay it without forcing a sale. The unmarried couple is the case that most often goes wrong here, because there is no spousal exemption to fall back on, which we set out in why your widow pays no inheritance tax on your pension but your partner does.

Who is most exposed

Pulling those threads together, the households that should look hardest at this before April 2027 are these.

• Unmarried couples with a pension pot and a home. No spousal exemption, so more of what passes to the survivor is exposed, and the pot now counts.
• Larger estates where a pension was the inheritance tax plan. Some people deliberately left pension money untouched precisely because it sat outside the estate. From April 2027 that plan no longer works the way it did.
• Families leaving money to children rather than a spouse, for example a widowed parent, where the spousal exemption is not available and the pot adds to the taxable total.
• Asset-rich, cash-poor estates, where a bill on a pension pot has to be met from somewhere, and the only somewhere is the house.

Notice that in every one of these cases, the death in service benefit itself is not the problem. It is the excluded, clean money. The problem is the pot beside it. That is the reversal the new rules create, and it is worth sitting with, because it changes which pieces of your provision are doing the reliable work.

What to review before April 2027

You do not need to do anything dramatic, but there are a few checks worth making calmly rather than in a rush in 2027.

Start by working out where a future inheritance tax bill would actually be paid from, and whether a beneficiary would be forced to sell the family home or cash in the pension to meet it. Then look at your nominations, on both the pension and any death in service scheme, and make sure they still name the people you intend, because these benefits are paid at the discretion of trustees guided by your expression of wish, not by your will. Divorce, remarriage and new children all make old nominations dangerous.

Consider whether life cover written in trust would meet a likely bill. Money held in trust sits outside the estate and pays quickly, which is what a family needs when the tax has to be paid before probate completes. If your own death in service turns out not to be enough for what your household actually owes, our guide on whether your work payout would actually clear your mortgage shows how to measure the gap, and the same benefit's tax treatment while you are alive is explained in whether death in service is a benefit in kind on your payslip.

If, having done the sums, you find there is a bill your family would struggle to meet from outside the estate, you can get life insurance quotes and have an FCA-authorised broker price cover written in trust against the figure you have worked out. Free, impartial guidance on inheritance tax and pensions is also available from MoneyHelper.

Scotland and Northern Ireland

Inheritance tax is a UK-wide tax, so the April 2027 change and the exclusion of death in service benefits apply the same way in Scotland, in Northern Ireland and in England and Wales. What differs across the UK is the law of succession that decides who inherits in the first place, and how an estate is administered.

In Scotland, the rules on legal rights give a surviving spouse, civil partner and children a fixed entitlement to part of the estate regardless of the will, and the process is confirmation rather than probate. In Northern Ireland the grant process differs again from England and Wales. None of this changes the tax treatment of a death in service benefit, but it can change who ends up receiving what, and therefore who bears any inheritance tax that does arise, so it is worth checking your nominations against the succession rules where you live. The wider set of employer-cover questions is collected in our hub on death in service and employer cover.

Frequently asked questions

Will death in service be caught by the 2027 pension IHT changes?

No. The government has confirmed that death in service benefits paid from a registered pension scheme are excluded from the change, so they remain outside the estate for inheritance tax. It is unused pension funds and most other pension death benefits that come into scope from April 2027, not the lump sum your employer's scheme pays.

What actually changes in April 2027?

Unused pension funds and certain lump sum death benefits become part of the estate for inheritance tax, with personal representatives responsible for reporting and paying. Pensions stop being an inheritance tax free way of passing money on, which changes how many families plan around them. Anything passing to a spouse or civil partner normally remains exempt.

What should families do before then?

Look at where the money for any inheritance tax would actually come from, and whether beneficiaries would be forced to sell something. Review nominations on both the pension and any death in service scheme, and consider whether life cover written in trust would meet the bill, since money in trust sits outside the estate and pays quickly.