Pensions, death benefits and inheritance tax

When someone dies, the pension's income-tax treatment depends on age at death, payment timing, benefit form and recipient. The lump sum and death benefit allowance limits how much of certain lump sums comes through tax-free. From 6 April 2027, most unused pension money also counts towards inheritance tax. Here are the current 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

Where the member dies before 75, an uncrystallised-funds lump sum paid within the applicable two-year window can be income-tax-free up to the remaining lump sum and death benefit allowance (LSDBA), £1,073,100 as standard. The excess is pension income, including where the recipient is non-qualifying (ITEPA 2003 s.637J(2)). A late payment, or death at 75 or older, takes that lump sum outside the allowance test: it is pension income for an individual in a qualifying capacity, while a non-qualifying recipient triggers the scheme administrator's 45% special charge. Recipient capacity matters: a company or an individual acting as trustee other than a bare trustee is non-qualifying. Beneficiary drawdown has separate designation rules (PTM073010; PTM073200; ITEPA 2003 ss.646B–646C).

That £53,322.00 is the tax on the excess (2026/27, rest of the UK) for a beneficiary who already has £30,000 of other gross income: the excess takes their income above £125,140, so it is taxed at 20%, 40% and 45% and also removes their £12,570 personal allowance — about 42% of the excess. The full workings are in the LSDBA explainer, and you can run the calculation on your own figures in 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, but only if the benefit may only be paid in excluded forms. A choice of an ordinary dependants' annuity defeats that exclusion even where a scheme pension is chosen (IHTA 1984 s.150A(6); HMRC technical note 2, “Dependants’ scheme pensions”). 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 around 38,500 will pay more. HMRC puts the average increase in inheritance-tax liability at around £34,000 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 worked illustration. The primary sources are HMRC’s May 2026 technical note and its 27 August 2026 technical note 2, with the earlier policy history in the gov.uk paper Inheritance Tax: unused pension funds and death benefits. The tax itself is law, and the information-sharing regulations (SI 2026/818) were made in July 2026 to start on 6 April 2027; HMRC’s detailed guidance and tools are still to come.

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 (the LSDBA test) · PTM073010 (death benefits taxable after 75) · FA 2024 Sch 9 · Finance Act 2026 · HMRC “Inheritance Tax on pensions” technical note (updated 29 May 2026) and technical note 2 (27 August 2026) · SI 2026/818