An Unused Pension Pot Is Heading Into the Taxable Estate

From 6 April 2027, most unused pension funds and death benefits will be counted as part of your estate for inheritance tax. So the honest answer to whether your pension will be taxed for inheritance tax from 2027 is: it can be, and for a lot of families it now will be. A pot that until recently sat entirely outside inheritance tax — one of the main reasons people were told to leave a pension untouched and spend other money first — is being pulled back inside the net.

What that means in practice is not that "the pension is taxed" as some separate thing. It means the value left in the pension is added to everything else you leave, and if the whole estate comes to more than the available tax-free allowances, inheritance tax is charged on the excess. The unused pension is no longer a tidy way around the tax. It is now part of the sum the tax is worked out on.

This page is about the part people miss: what that does to the number your family actually receives, and where the money to pay the tax has to come from when the thing being taxed is the pension pot itself.

The short answer: the pot joins the estate from April 2027

For years, a defined contribution pension that you had not fully spent could usually be passed on free of inheritance tax. If you died with money still in the pot, it went to whoever you had nominated, and it did not count towards the estate that inheritance tax is charged on. That is the feature that made a pension such an efficient thing to leave behind, and it is precisely the feature being removed.

From 6 April 2027, most unused pension funds and death benefits are brought inside the estate for inheritance tax. The change was announced at the 2024 Budget, consulted on through 2025, and legislated in the Finance Act 2026. It applies to deaths on or after that date, so it is the date of death that decides the treatment — not the date the pension was set up, and not the date you retired.

Source: HM Revenue & Customs, Inheritance Tax on unused pension funds and death benefits, and Finance Act 2026, published on gov.uk.

Whether it costs your family anything still depends, as it always has, on the size of the whole estate. Inheritance tax is charged at 40% on the value above the available tax-free allowances, and the main nil-rate band has been frozen at £325,000. Below the allowances there is no tax to pay. The pension change simply makes it far more likely that an estate tips over the threshold, because a large asset that used to be invisible to the calculation is now sitting inside it.

Source: HM Revenue & Customs, Inheritance Tax rates and allowances, gov.uk.

What changes on 6 April 2027, and what stays the same

It helps to separate what is genuinely new from what people assume is new, because the headlines have blurred the two.

What changes is the inheritance tax treatment of money left in a pension. An unused defined contribution pot, and most lump-sum death benefits paid because you have died, will be added to the value of your estate and can be taxed at the same rate as the rest of it. That is the whole of the reform, and it is a real change of principle rather than a tinker at the edges.

What does not change is the set of allowances, the exemption for anything passing to a spouse or civil partner, or the ordinary logic of how inheritance tax works. A pension you draw down and spend during your own lifetime is not affected at all — there is nothing unused left to tax. The change reaches only what is still in the pot when you die.

One detail did move during the consultation, and it matters for whoever has to deal with the estate: responsibility for reporting and paying the tax shifted from pension scheme administrators to the personal representatives of the estate. Because the rules were refined more than once before they were finalised, it is genuinely worth checking the current position on gov.uk before making any firm decision, rather than acting on an early summary written while the design was still moving.

Where the tax actually has to be found

This is the question that catches families out, and it is the real subject of this page. When the asset being taxed is a pension, the tax does not politely arrive from somewhere else. It has to be found, and often the only liquid thing in the estate large enough to find it from is the pension itself.

Under the finalised approach, beneficiaries can ask the pension scheme to pay the inheritance tax attributable to the pension directly out of the fund. That solves the practical problem of where the cash comes from — but it does so by making the pot smaller before anyone receives it. If a slice of the pension is taken in tax at 40%, your beneficiaries receive what is left, not the figure on the last statement you saw.

The alternative is that the personal representatives settle the tax from the rest of the estate. That sounds cleaner, but the rest of the estate is frequently a house — which cannot be sold quickly — and bank accounts that are frozen from the moment the bank is told of the death. So the money is notionally there and practically out of reach, which is why families are so often surprised by how hard it is to lay hands on the cash. We set out that squeeze — the costs that fall due while the estate's own accounts are still frozen — in who actually pays the probate costs before the money is released, and it is the same trap that leaves people short when probate has been granted for weeks and the bank still has not paid the money out.

The blunt version is this: the pension change does not only decide whether tax is due. It decides that the pot you thought of as your family's inheritance is now the most obvious place the tax will be taken from.

A surviving spouse still pays nothing — an unmarried partner does

The single most important exemption survives the change untouched. Anything you leave to a husband, wife or civil partner passes free of inheritance tax, and that includes an unused pension. So if your pension goes to your spouse, the 2027 change does not create a bill on your death. The value simply moves across, and it will only come back into charge when your spouse later dies, if it is still unused then.

The couples the reform hits hardest are the ones with no marriage or civil partnership to lean on. An unmarried partner has no spouse exemption, however long you have lived together and however plainly you intended the pension for them. The same pot that would pass tax-free to a wife can be taxed at 40% on its way to a partner. We have written that contrast up on its own because it is so easily missed: your widow pays no inheritance tax on your pension, but your partner does.

If you are cohabiting rather than married, this is the change that should make you check where your pension is actually pointed and what it will cost the person you leave it to. The rules do not bend for how committed the relationship was; they bend only for the legal status of the two people involved.

The second charge: inheritance tax, then income tax

There is a second layer that turns a bad outcome into a worse one for some families, and it depends entirely on your age when you die.

If you die before 75, your beneficiaries can usually draw an inherited pension without paying income tax on it, within the relevant allowances. If you die at or after 75, your beneficiaries pay income tax on whatever they withdraw, at their own marginal rate. That income tax treatment already exists and is not new. What is new is that, from 6 April 2027, the same unused pot can face inheritance tax first and then income tax as your beneficiaries draw it down.

Source: HM Revenue & Customs, Tax on a private pension you inherit, gov.uk.

That combination is why the reform matters more than the 40% headline suggests for a pot inherited after age 75. Inheritance tax takes its share of the value, and then income tax takes a share of what a working-age or higher-rate beneficiary draws from the remainder. We are deliberately not putting a single combined percentage on that, because it depends on the beneficiary's own income and on the final detail of the rules — but it is the reason to plan around your date of death and your beneficiaries' tax position together, rather than treating either charge on its own.

What this means for whoever administers the estate

The shift of responsibility onto the personal representatives is not a formality. Whoever administers the estate now has to establish the value of the unused pension, report it as part of the inheritance tax account, and deal with the tax on it — and to do that they need information from the pension scheme, sometimes before the grant has even been issued.

That adds steps, and steps add time, in a process that is already slow. It also raises the stakes on a mistake, because the personal representatives are the ones on the hook for getting the figures right and for not paying beneficiaries too early. It is exactly the sort of extra complexity that leads to a query from the probate registry — the kind we describe in why the probate registry stops an application — and it is worth reading alongside the wider picture in our guide to probate, the estate and inheritance tax.

If you are the person likely to have to do this, the practical takeaway is to find out now which schemes hold unused funds, who the nominated beneficiaries are, and whether the money is inside or outside the estate for tax. Sorting that while the pension holder is alive is a great deal easier than reconstructing it afterwards from paperwork nobody can find.

What is not caught by the change

Not every death benefit is swept in, and the exclusions matter because they change the whole calculation for some families.

Death-in-service lump sums paid from a registered pension scheme are expected to stay outside inheritance tax. That is a meaningful carve-out for anyone whose main protection for their family is a benefit through their employer, and we have set it out separately in how death in service escapes the 2027 pension change. Many survivors' pensions paid to a dependant from a scheme — a widow's or widower's scheme pension, rather than a pot of money — are also outside the new charge, which we cover in why a dependant's scheme pension is not caught by the 2027 rule. Money left to charity is exempt as well, as it always has been.

Knowing which category your own arrangements fall into is the difference between a real problem and a false alarm. Two people with pensions of the same size can face completely different outcomes depending on whether the money is an unused drawdown pot, a death-in-service benefit, or a scheme pension for a survivor.

Where the change does create a bill, the cleanest way to stop it landing on the pension or the house is to hold money that sits outside the estate altogether. A life insurance policy written in trust does not form part of your estate, so it can hand your beneficiaries a lump sum to meet an inheritance tax bill without them having to raid the pension or sell the family home to find it. Whether cover is available, and on what terms, depends on your age and health and on the insurer's underwriting — so if that is the gap you are trying to close, you can get life insurance quotes and have an FCA-authorised broker price it against your own position.

Frequently asked questions

Will pensions really be counted for inheritance tax from 2027?

Yes. Most unused pension funds and death benefits form part of a person's estate for inheritance tax for deaths on or after 6 April 2027, and this is now set out in the Finance Act 2026 rather than being only a proposal. Because the detail changed more than once as the rules were developed, check the current position on gov.uk before planning around it.

Who pays the tax on a pension caught by the change?

The personal representatives of the estate are responsible for reporting and paying it. In practice the inheritance tax attributable to the pension can be met from the fund itself, at the beneficiaries' request, which means the pot shrinks before anyone receives it rather than the tax having to be found from other assets in the estate.

Does income tax still apply to inherited pensions as well?

Where the pension holder died at or after 75, beneficiaries already pay income tax on what they withdraw, at their own marginal rate. That treatment sits alongside the new inheritance tax charge, so from 2027 the same money can face both. Families should look at the combined effect rather than either charge on its own.