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From 6 April 2027, most unused pension funds will count towards your estate for inheritance tax (IHT). This is now law. Finance Act 2026 received Royal Assent on 18 March 2026.
For many families, pensions have been the most tax-efficient way to pass on wealth. That advantage is about to disappear. New analysis from NFU Mutual shows some estates could lose up to 91% of a pension pot to tax.
Here’s what’s changing, who is affected, and what you can do about it.
What the new rules say
Under current rules, most pension pots sit outside your estate. If you die before 75, your beneficiaries usually inherit the fund free of income tax too.
From April 2027, unused pension funds and most death benefits will be added to the value of your estate. IHT is charged at 40% on anything above your available allowances.
Some things will not change:
- Pensions left to a spouse or civil partner will still qualify for the spousal exemption.
- Death in service benefits from registered pension schemes remain outside IHT.
- If someone dies before 6 April 2027, the old rules apply, even if benefits are paid later.
Executors, not pension providers, will be responsible for reporting and paying the IHT due. They can ask a pension scheme to withhold up to 50% of the taxable benefits for up to 15 months to cover the bill.
Why the charge can reach 91%
NFU Mutual describes a “triple tax blow” for some families. Three separate charges can stack up on the same pension.
1. IHT on the pension itself. The pot is now part of the estate, so 40% applies above the allowances.
2. Loss of the residence nil rate band. This extra £175,000 allowance per person tapers away once an estate exceeds £2 million. Adding a pension to the estate can push it over that line. At £2.7 million, a couple’s combined £350,000 residence allowance is lost entirely.
3. Income tax for beneficiaries. If the pension holder dies after 75, beneficiaries pay income tax on withdrawals at their marginal rate. A 40% taxpayer would face a combined rate of 60%. An additional rate taxpayer would face 85%.
A worked example
NFU Mutual modelled a married couple with £2 million of assets and a £700,000 pension. The estate passes to the survivor first, then to their children.
If the survivor dies before April 2027: the pension is free of IHT. The couple keep both residence allowances. The family pays £400,000 IHT on the rest of the estate.
If the survivor dies after 5 April 2027: the pension now sits in the estate, which rises to £2.7 million. The residence allowance is lost, adding £140,000 to the bill. IHT jumps from £400,000 to £820,000. That is an effective 60% charge on the pension alone.
If the survivor also dies after 75: the children pay income tax on withdrawals. If pushed into the 45% band, that adds £219,326. Total tax linked to the pension reaches £639,326, or 91.3% of the fund.
In Scotland, where the top rate is 48%, the effective rate rises to 93%.
These are extreme scenarios. Most estates will not face charges anywhere near this level. But the direction of travel is clear, and the numbers rise quickly for larger estates.
Who should pay attention
This is not just an issue for the very wealthy. IHT allowances have been frozen for years and are not expected to rise before 2030. Property values have climbed sharply over the same period.
You should review your position if:
- Your combined estate, including pensions, is close to or above £2 million.
- You have a large defined contribution pension you do not expect to spend.
- You are approaching 75.
- Your current plan assumes your pension sits outside IHT.
Practical steps to consider
Sean McCann, chartered financial planner at NFU Mutual, is clear on one point. Do not rush into rash decisions. Some options to discuss with an adviser include:
Take your tax-free lump sum before 75. It may still be subject to IHT, but it avoids the extra income tax charge for beneficiaries.
Draw a regular income and gift the surplus. Regular gifts from income are immediately exempt from IHT, provided they do not affect your normal standard of living. There is no upper limit and no seven-year rule.
Use other gifting allowances. You can give away £3,000 each tax year with no IHT consequences. Larger gifts usually need you to survive seven years.
Review your nominations. Check your expression of wishes forms. Leaving a pension to a spouse or civil partner preserves the exemption on first death.
Consider life cover in trust. A policy written in trust can meet a potential IHT bill without adding to the estate.
Look at the whole estate. Pensions, property and other assets now need to be planned together, not separately.
Don’t compromise your own security
The changes are significant, but your pension is still there to fund your retirement. Giving too much away too early can leave you short later. Any plan needs to balance tax efficiency with your own financial needs.
If you would like to understand how these changes affect your family, our team can help. Get in touch to arrange a conversation.
This article is for general information only and does not constitute financial or tax advice. Figures are based on NFU Mutual’s published illustrations and the rules confirmed in Finance Act 2026.