Pensions, death benefits and inheritance tax

When someone dies, what happens to their pension depends on two things today — and a third arrives soon. The first is the age they died at: that decides the income tax. The second is a single allowance that limits how much of a lump sum comes through tax-free. The third, from 6 April 2027, is inheritance tax on any unused pension. Here are the settled rules first, then the dated change.

Who gets the pension

Most modern pensions are paid out at the pension provider’s discretion, guided by the form the member filled in naming who they would like to benefit — the “expression of wish”. That discretion is the reason a pension has, until now, sat outside the estate for inheritance tax. Whoever inherits can usually take the money as a lump sum or keep it invested as beneficiary drawdown, and that choice feeds into the tax below.

Income tax: the age-75 line

Everything here turns on one date — whether the member died before their 75th birthday or after it. Die before 75 and death benefits are usually free of income tax for the person who inherits. The one catch is a lump sum, which is measured against an allowance: the lump sum and death benefit allowance (LSDBA), £1,073,100 as standard. Anything above that allowance is taxed at the beneficiary’s own income-tax rate. Die at 75 or older and the whole benefit is taxed as the beneficiary’s income — lump sum or drawdown — and the allowance test drops away (PTM173000).

That £51,436.50 is the tax on the excess for a beneficiary who already has £30,000 of other income. The full workings are in the LSDBA explainer, and you can test a real case on the LSDBA calculator. (PTM172000 · PTM173000 · FA 2024 Sch 9.)

Inheritance tax from 6 April 2027

Here is the big change. For deaths on or after 6 April 2027, most unused pension money and pension death benefits count towards the estate for inheritance tax, alongside everything else the person owned. It was announced at the Autumn 2024 Budget and became law in Finance Act 2026 (Royal Assent 18 March 2026). It does not undo the income-tax rules above — both apply from 2027.

Two familiar exemptions carry across. Anything left to a surviving spouse or civil partner, or to a registered charity, stays exempt. Death-in-service benefits from a registered scheme, and a qualifying dependants’ scheme pension, sit outside the charge — the dependants’ scheme-pension exclusion applies whatever the type of pension arrangement. The government expects that, of roughly 213,000 estates with inheritable pension wealth in 2027–28, about 10,500 will owe inheritance tax that would not have before, and a further 38,500 will pay more — on average around £34,000 more once pensions are counted.

Who reports it, who pays and how are unpacked in pensions and inheritance tax from April 2027. Use the Pension IHT calculator for a case illustration. The primary source is HMRC’s May 2026 technical note, with the earlier policy history in the gov.uk paper Inheritance Tax: unused pension funds and death benefits. The tax itself is law; the detail of how information is shared is still being finalised.

For planning and illustration only. This guide states the current rules and the enacted change; it is not financial, tax or estate-planning advice, and does not recommend any course of action.

PTM172000 · PTM173000 · FA 2024 Sch 9 · Finance Act 2026 · HMRC “Inheritance Tax on pensions” technical note (updated 29 May 2026) · engine reading ADR-024