Inheritance Tax on Pensions From April 2027: A £200,000 Pension Pot Worked Example
From 6 April 2027, most unused pension funds and pension death benefits will be counted as part of your estate for Inheritance Tax (IHT). A pot you once treated as IHT-free could now be taxed at 40% — and if you die at 75 or over, your beneficiaries can be hit with income tax on the same money too. This guide walks through a £200,000 pot added to a £400,000 estate, line by line, using the official HMRC rules.
What is changing on 6 April 2027
For years, defined contribution pensions (SIPPs, personal pensions, drawdown pots) sat outside your estate for IHT. They were one of the most efficient ways to pass wealth down — you could draw on other savings first and let the pension cascade to your children largely untaxed.
That ends for deaths on or after 6 April 2027. HMRC's policy paper is explicit: "This measure will take effect in respect of deaths on or after 6 April 2027," and "most unused pension funds and pension death benefits will be included within the value of a person's estate for Inheritance Tax purposes." (GOV.UK — Inheritance Tax: unused pension funds and death benefits).
The thresholds that decide how much tax you pay have not moved, and they are frozen for a long time:
| Allowance / rate | 2027/28 figure | Notes |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | Frozen until April 2031 |
| Residence nil-rate band (RNRB) | £175,000 | Only if a home passes to children/grandchildren; frozen to April 2031 |
| Standard IHT rate | 40% | On the estate value above available allowances |
| Reduced rate (10%+ to charity) | 36% | Where 10% or more of the net estate goes to charity |
| Spouse / civil partner transfer | 0% (fully exempt) | Maintained for pensions too from 2027 |
Figures confirmed via GOV.UK — How Inheritance Tax works and the GOV.UK nil-rate band freeze confirmation. The freeze to April 2031 was set at the Autumn Budget 2025.
Meet Margaret. Margaret is 73, widowed, and lives in Sheffield. When she dies, she leaves:
- A house and other assets worth £400,000
- An unused SIPP (drawdown pot) worth £200,000
- Her late husband's full unused nil-rate band, transferred to her (so she has two NRBs)
- Her home passes to her two children, so the residence nil-rate band is also in play
Step 1 — Value the estate under the new rules. Before 2027, IHT would only have looked at the £400,000. From 6 April 2027 the £200,000 pot is added in:
£400,000 + £200,000 = £600,000 taxable estate
Step 2 — Apply Margaret's allowances. As a widow with a transferred NRB and a home going to her children, Margaret has a large combined allowance:
- Her own NRB: £325,000
- Transferred NRB from her husband: £325,000
- Own RNRB: £175,000 + transferred RNRB £175,000 (capped against the home value, assumed available here)
For clarity, this example follows the simpler and more common single-allowance position — that is the scenario most readers searching this query are in. If we instead assume Margaret has only her own £325,000 NRB and no RNRB available (for instance, no qualifying home or no surviving children inheriting it):
£600,000 − £325,000 = £275,000 above the threshold
Step 3 — Apply 40%.
£275,000 × 40% = £110,000 IHT
The pension's share of that bill: Had the pot stayed outside the estate, the taxable amount would have been £400,000 − £325,000 = £75,000, taxed at 40% = £30,000. Adding the £200,000 pot pushes the bill from £30,000 to £110,000 — an extra £80,000 of IHT, which is exactly 40% of the £200,000 pot. The pension is now fully exposed to the 40% rate.
How the same case looks with full transferred allowances
If Margaret does have both NRBs and both RNRBs available (£325,000 × 2 + £175,000 × 2 = £1,000,000 of allowance, subject to the RNRB taper and the home being worth at least £350,000), her £600,000 estate sits comfortably below that and there is no IHT at all. This is the single most important planning point: whether the pot creates a bill depends entirely on the allowances that survive into the estate. The table below shows the swing.
| Scenario | Taxable estate | Allowances | IHT due |
|---|---|---|---|
| Pre-2027 (pension excluded), single NRB | £400,000 | £325,000 | £30,000 |
| From 2027 (pension included), single NRB | £600,000 | £325,000 | £110,000 |
| From 2027, two NRBs + two RNRBs available | £600,000 | up to £1,000,000 | £0 |
The double-tax trap: IHT plus income tax over age 75
This is the part most headlines miss, and it is where the real pain sits. The 2027 change deals only with Inheritance Tax. It does not remove the existing income tax rules on inherited pensions. Those rules turn on the age you die:
- Die before 75: beneficiaries can usually draw the pot free of income tax (subject to the lump sum and death benefit allowance).
- Die at 75 or over: beneficiaries pay income tax at their own marginal rate on whatever they withdraw — 20%, 40% or 45% depending on their other income.
This income tax position is long-standing and set out in HMRC guidance on death benefits (see GOV.UK — Tax on a private pension you inherit). From 2027, a pot belonging to someone who dies at 75+ can therefore be taxed twice: once as IHT on the estate, and again as income tax when the beneficiary draws it.
Back to Margaret — now assume she dies at 76, single-NRB scenario. Her £200,000 pot has already suffered £80,000 of IHT (its 40% share). That leaves £120,000 of pot to pass on.
Her son David inherits it. David is a higher-rate taxpayer (40% marginal rate). Because Margaret died after 75, David pays income tax at his marginal rate as he draws the money down:
£120,000 × 40% income tax = £48,000
Net to David: £120,000 − £48,000 = £72,000.
Out of the original £200,000 pot, the family keeps £72,000. The combined effective tax rate is 64% (£128,000 of the £200,000 lost to tax). That is the double-tax trap in numbers.
Note the mechanics: IHT is calculated on the gross pot, then income tax applies to what the beneficiary actually withdraws. The two taxes stack; there is no credit of one against the other under the published rules. Beneficiaries who are basic-rate taxpayers, or who spread withdrawals across several tax years to stay within lower bands, can reduce the income tax slice — but they cannot avoid the IHT once it bites.
Personal representatives become liable to report and pay
Under the final design HMRC confirmed, the responsibility for reporting and paying the IHT on a pension does not fall on the pension scheme — it falls on the estate. HMRC states plainly: "Personal representatives, rather than pension scheme administrators, will be liable for reporting and paying any Inheritance Tax due on unused pension funds and pension death benefits."
If you are a personal representative (an executor named in a will, or an administrator where there is no will), that means:
- You must identify all of the deceased's pensions and obtain date-of-death values from each scheme.
- You include the unused pension value in the IHT account alongside the rest of the estate.
- You are accountable for the tax — even though the pension money may be paid directly to a beneficiary and never passes through your hands.
To stop personal representatives being out of pocket, HMRC's rules let a PR direct the pension scheme to either pay the IHT due on the pension straight to HMRC, or withhold up to 50% of the taxable benefits for up to 15 months from the date of death before releasing the rest. Practically, that means executors should contact every pension scheme early in the administration and agree how the tax will be funded before benefits are distributed.
- From 6 April 2027, most unused defined contribution pension pots count toward your IHT estate.
- A £200,000 pot can add up to £80,000 of IHT (40% of the pot) once your allowances are used up.
- Die at 75 or over and beneficiaries also pay income tax at their marginal rate — a combined hit that can reach roughly 64% in the worked example.
- Personal representatives, not pension schemes, must report and pay the IHT; they can direct schemes to fund it.
- Death-in-service benefits from a registered scheme, and certain dependant's defined benefit scheme pensions, stay outside scope.
- Whether a bill arises hinges on your nil-rate bands — a transferred NRB or RNRB can erase the charge entirely.
What stays outside scope — and your planning responses
Benefits that remain IHT-free from 2027
HMRC has confirmed two important carve-outs (GOV.UK policy paper):
- Death-in-service benefits paid from a registered pension scheme are excluded from the value of the estate. The employee life-cover lump sum your job provides is not caught.
- Dependant's scheme pensions from a defined benefit (final salary) arrangement, or from a collective money purchase arrangement, are excluded.
- The existing spouse / civil partner exemption is maintained — pension death benefits passing to a surviving spouse or civil partner remain IHT-free, as do those passing to a registered charity.
Sensible planning responses (general, not advice)
- Reconsider the "spend other money first" order. The old logic of preserving the pension and spending ISAs/cash first may now reverse for some people. Drawing the pension during retirement — within sensible income tax bands — can shrink the taxable estate.
- Use the spousal exemption deliberately. Nominating a spouse or civil partner keeps the pot fully exempt; the tax question is then deferred to the second death.
- Watch the age-75 cliff edge. Crystallising or gifting before 75 (where appropriate) can change the income tax outcome for heirs entirely.
- Consider gifting from surplus income or capital, using the normal expenditure out of income exemption and the seven-year rule — these reduce the estate that the pension is now part of.
- Check death-in-service cover separately, since it remains outside scope and can be a tax-efficient way to provide for a family.
- Review nominations and your will together. Because PRs are now on the hook for the tax, the way benefits are nominated affects who funds the IHT — coordinate the two.
The right answer is personal and depends on your full financial picture. Given the figures involved, this is a strong case for advice from a regulated financial adviser and, for the estate side, a STEP-qualified practitioner or solicitor.
Frequently asked questions
When exactly do the new pension IHT rules start?
They apply to deaths on or after 6 April 2027. For anyone who dies before that date, the old position (most unused pension pots outside the estate) still stands.
Does my whole pension get taxed at 40%?
No. IHT at 40% only applies to the part of your total estate that sits above your available nil-rate bands. If your allowances cover the estate including the pension, there may be no IHT at all. The 40% applies only to the excess.
What is the double-tax trap?
If you die at 75 or over, your beneficiaries pay income tax at their marginal rate on pension money they draw — this is an existing rule. From 2027 the same pot can also be inside your estate for IHT. So one pot can face IHT and then income tax, which is why effective rates can climb well above 40%.
Are death-in-service benefits affected?
No. HMRC has confirmed that death-in-service benefits paid from a registered pension scheme are excluded from the estate for IHT from 6 April 2027, as are certain dependant's defined benefit scheme pensions.
If I leave my pension to my spouse, is there tax?
No IHT on that transfer. The existing spouse and civil partner exemption is maintained for pensions, so death benefits passing to a surviving spouse or civil partner remain exempt. Tax is then considered on the second death.
Who has to pay the tax — the pension company or my executor?
Your personal representatives (executors or administrators) are liable to report and pay the IHT on the pension. They can direct the scheme to pay the tax to HMRC or withhold up to 50% of the benefit for up to 15 months to fund it.
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Sources: HMRC — Inheritance Tax: unused pension funds and death benefits · GOV.UK — How Inheritance Tax works · GOV.UK — Tax on a private pension you inherit · GOV.UK — nil-rate band freeze. Verified 2026-06-03.