Pensions, death benefits and inheritance tax

How a pension passes on death is governed today by two things: the member’s age when they die, which sets the income-tax treatment, and the lump sum and death benefit allowance, which caps the tax-free lump sum. For deaths on or after 6 April 2027 a third layer is added — inheritance tax on the unused fund. This guide sets out the settled rules and the dated change.

First, who receives it

Most modern pensions pay death benefits at the scheme administrator’s discretion, guided by the member’s nomination (the “expression of wish”). That discretion is what has historically kept the fund outside the member’s estate for inheritance tax. The beneficiary can usually take the benefit as a lump sum or as beneficiary drawdown, and that choice interacts with the tax treatment below.

Income tax: the age-75 line

The income-tax treatment of a death benefit turns on whether the member died before or after age 75 (PTM173000). Die before 75 and death benefits are generally free of income tax in the beneficiary’s hands — but a lump sum is tested against the lump sum and death benefit allowance (LSDBA), £1,073,100 as standard, and any excess is taxed at the beneficiary’s marginal rate. Die at or after 75 and the benefit is taxed as the beneficiary’s income at their marginal rate, whether taken as a lump sum or as drawdown, and the LSDBA test no longer applies.

That £51,436.50 is the income tax on the lump-sum excess for a beneficiary with £30,000 of other income; the full mechanics are in the LSDBA explainer, and a specific event can be tested on the LSDBA calculator. (PTM172000 · PTM173000 · FA 2024 Sch 9.)

Inheritance tax from 6 April 2027

Announced at the Autumn 2024 Budget and confirmed in the government’s July 2025 consultation response, a further change takes effect for deaths on or after 6 April 2027: most unused pension funds and pension death benefits are brought within the value of the estate for inheritance tax. The existing income-tax rules above are not repealed by it.

Two exemptions carry over from ordinary inheritance tax: benefits passing to a surviving spouse or civil partner, and to a registered charity, remain exempt. Death-in-service benefits from a registered pension scheme, and dependants’ scheme pensions from a defined-benefit or collective-money-purchase arrangement, are excluded from the charge. The government estimates that of around 213,000 estates with inheritable pension wealth in 2027–28, about 10,500 will have an inheritance-tax liability where previously they would not, and a further 38,500 will pay more — an average increase of around £34,000 once pension assets are included.

ParaplanAI does not compute inheritance tax — it is outside the calculator suite — so this is an explainer, not a tool. The detail, the personal-representative reporting route and the payment mechanics are unpacked in pensions and inheritance tax from April 2027, and the source is the gov.uk policy paper Inheritance Tax: unused pension funds and death benefits. As announced legislation, the final detail should be confirmed against the published rules.

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

PTM172000 · PTM173000 · FA 2024 Sch 9 · gov.uk “Inheritance Tax: unused pension funds and death benefits” (6 April 2027) · engine reading ADR-024