Death In Service Is Excluded From The 2027 Change

Does death in service count towards inheritance tax? For benefits paid from a registered pension scheme, the answer is no — and it stays no after the big pension tax change arriving on 6 April 2027. This is one of the few genuinely reassuring answers in a subject that mostly delivers unpleasant ones, so it is worth stating plainly before the caveats: a death in service lump sum from a registered scheme is not being pulled into inheritance tax by the 2027 reform.

The reason this needs saying at all is that a wave of coverage about pensions and inheritance tax has left a lot of people assuming everything a pension pays out on death is now taxable. It is not. The change is aimed at unused pension funds and certain lump sum death benefits, and death in service benefits from registered schemes were specifically carved out of it. If your employer provides "four times salary" or similar cover through a registered scheme, that is the benefit this page is about, and the headline you are worried about does not apply to it.

What follows explains exactly what the exclusion covers, why the old distinction between discretionary and non-discretionary benefits mattered, and — the part most coverage skips — what the exclusion does not cover, so you do not walk away reassured about the wrong thing.

The short answer: a registered scheme death in service benefit is not caught

Death in service cover is the lump sum an employer arranges to be paid if an employee dies while still working — often expressed as a multiple of salary. Where it is provided through a registered pension scheme, it is excluded from the April 2027 inheritance tax change. That is the headline, and it holds whether the benefit is a modest single multiple of pay or a larger one.

There is also a good historical reason the exclusion makes sense. Death in service benefits payable at the discretion of trustees have not generally formed part of the member's estate in the first place, because the member had no right to the money and could not direct it — the trustees decide who gets it. So for a great many people this benefit was already outside inheritance tax, and the 2027 change leaves that position intact rather than overturning it.

If your death in service is tied to a multiple of earnings, it is worth checking exactly what counts towards that multiple, because bonus and commission are not always included. We cover that in whether your bonus counts towards death in service — a separate question from tax, but one that changes the size of the payment your family receives.

What the April 2027 change actually does

To see why the exclusion matters, it helps to know what the change does to everything it does cover. Broadly, from 6 April 2027 unused pension funds and certain lump sum death benefits from registered pension schemes are brought into a person's estate for inheritance tax. The spouse and civil partner exemption is preserved, so anything passing to a husband, wife or civil partner remains exempt, but amounts passing to others can be chargeable above the available nil-rate band.

Source: HM Treasury and HMRC policy paper, Inheritance Tax on unused pension funds and death benefits from 6 April 2027, GOV.UK. The standard inheritance tax rate above the available nil-rate band is 40%.

Against that backdrop, the death in service exclusion is a deliberate limit on the reach of the change. The government's aim was to stop pensions being used purely as a tax-free way to pass on wealth, not to tax the safety-net lump sum an employer provides if a worker dies mid-career. So the two are treated differently on purpose. A companion piece to this one, how death in service escapes the 2027 pension inheritance tax change, covers the same ground from the angle of someone comparing their workplace benefits.

Why "discretionary" has always mattered

Before this change, the key question for whether a death benefit fell inside or outside an estate was often how it was payable. It is worth understanding, because it is the mechanism the exclusion is built on.

Where a benefit is payable at the trustees' discretion — they consider the member's expression of wish but are not bound by it — the member never owned the money and could not compel it to any particular person. Money the deceased did not own does not usually form part of their estate, so a discretionary death benefit generally sat outside inheritance tax. Where, by contrast, a benefit was payable as of right to a named individual, so that person was legally entitled to it, it could be treated as the member's property and drawn into the estate.

The important point for 2027 is that the exclusion for registered scheme death in service benefits was drafted to cover both routes — discretionary and non-discretionary alike — so you do not need to prove your particular arrangement was discretionary to be reassured. That said, the discretionary route still has a practical advantage: it tends to pay quickly, without waiting for the estate to be administered, which is exactly when a bereaved family needs money.

The trap: your unused pension pot is not excluded

This is the part most coverage misses, and it is the reason to read past the reassuring headline. The exclusion is for death in service benefits. It is not for the pension pot you have been building up.

Unused defined contribution funds — the SIPP, the workplace pot, the personal pension you have been paying into — are brought into the estate for inheritance tax from 6 April 2027. So it is entirely possible for one payment from your pension arrangements to sit outside the estate and another to sit inside it. A family could receive a death in service lump sum free of inheritance tax and, at the same time, find the deceased's unused pension pot counts towards a bill. The word "pension" appears in both, but the tax treatment is not the same.

It is worth seeing how the two can stack in a single case. Imagine someone who dies in their fifties, still employed, with a workplace death in service benefit and a personal pension pot they had never touched. The death in service lump sum is excluded and reaches the family cleanly. The unused pot, if it passes to anyone other than a spouse or civil partner, is measured against the estate for inheritance tax from April 2027, and — depending on the age at death — may also be taxable as income when the beneficiaries draw it. Same person, same word "pension" on both statements, two entirely different tax outcomes. That is why lumping all pension death benefits together, in either direction, gets people into trouble: it is worth taking each benefit and asking specifically which regime governs it.

Not everything defined-benefit is caught either, which is a further reason not to over-worry. A survivor's pension from a final salary scheme is excluded, as we set out in why a widow's pension from a final salary scheme is not caught by the 2027 rule. The line runs between unused funds and lump sums on one side, and scheme pensions and registered death in service benefits on the other. Knowing which of your benefits sits on which side is the whole exercise.

Registered scheme or excepted group life?

Not all employer death in service is provided through a registered pension scheme. Some is arranged as an excepted group life policy, which sits outside the registered pension regime and under its own set of rules. This distinction matters, because the 2027 exclusion is expressed in terms of registered scheme benefits.

An excepted group life arrangement is typically written under a trust of its own, which usually keeps the payout outside the member's estate, but it operates under different tax rules that can include their own periodic charges depending on how the trust is structured. It is not automatically better or worse — it is a different regime, chosen by employers for various reasons. The practical takeaway is not to assume: ask your employer or the scheme provider whether your death in service is provided through a registered pension scheme or an excepted group life policy, so you know which set of rules governs it before you rely on either.

What this means for your nomination, and after a divorce

Tax treatment decides how much reaches your family. Your nomination decides who. The two are separate, and getting the tax answer right is no comfort if the money goes to the wrong person.

Because most death in service benefits are paid at the trustees' discretion, they are guided by the expression of wish or nomination form you completed — often years ago, often when you joined. If your life has changed since, the form may point somewhere you would no longer choose. This is especially sharp after a separation, because a divorce does not quietly update your pension paperwork the way it revises parts of a will. We explain that gap in why divorce rewrites your will but not your pension nomination. The fix is simple and free: review the form and resubmit it.

Where the benefit or a pot might be exposed to inheritance tax — the unused fund rather than the death in service lump sum — writing cover into trust is the established way to keep a payout outside the estate and get it to beneficiaries quickly. Our guide to why a life payout can be taxed at 40% and how trusts prevent it covers the mechanism. If you are reviewing your protection in light of all this, you can get life insurance quotes and have an FCA-authorised broker look at how any cover is set up as well as how much it is for.

Scotland, Northern Ireland and what to check now

Inheritance tax is a UK-wide tax, so the 2027 change and the death in service exclusion apply the same way in Scotland, Wales, England and Northern Ireland. What differs by nation is the wider machinery of administering an estate — obtaining confirmation in Scotland rather than a grant of probate, and the separate process in Northern Ireland — which affects the timing of when an estate's tax position is settled, but not whether death in service is caught. A discretionary death in service benefit, paid outside the estate, generally reaches the family without waiting for that machinery at all.

Two things are worth doing now. Confirm whether your death in service is provided through a registered scheme or an excepted group life policy, so you know which rules apply. And separate, in your own mind, the death in service lump sum (excluded) from any unused pension pot (not excluded), because the reassuring answer applies to only one of them. You can read the rest of this topic in our guide to pensions, nominations and death benefits.

Frequently asked questions

Is a death in service lump sum subject to inheritance tax?

Death in service benefits paid from a registered pension scheme are excluded from the inheritance tax change taking effect on 6 April 2027. Where such benefits are payable at the trustees' discretion, they have not generally formed part of the member's estate in the first place, so for many people the position is unchanged: the lump sum reaches the family without an inheritance tax charge.

Does it matter whether the payment is discretionary?

It has mattered historically: a benefit payable at trustee discretion sits outside the estate, whereas one payable as of right to a named person could be treated as the member's property. The exclusion announced for registered scheme death in service benefits was drafted to cover both routes, so you are not left exposed by which one applies — though the discretionary route still tends to pay out faster.

Does the exclusion cover my unused pension pot as well?

No, and this is the point most coverage misses. The exclusion is for death in service benefits. Unused defined contribution funds you have built up are brought into the estate for inheritance tax from 6 April 2027, so one payment can sit outside the estate and the other inside. Check which of your pension benefits is which before assuming the reassuring answer applies to all of them.