How the 2027 pension inheritance tax changes could affect your will

From 6 April 2027, unused pension funds will usually form part of an individual’s estate for inheritance tax purposes.

This represents a significant change to estate planning and may affect how wills are drafted, how death benefits are distributed and the amount beneficiaries ultimately receive. Existing wills and succession plans should therefore be reviewed.

Although unused pension funds are not physically part of the estate, they will be treated as such for inheritance tax purposes. 

For pensions paid under discretionary arrangements, the pension scheme administrators (PSAs) will continue to determine who benefits from the pension assets. Not all pension death benefits are paid under discretion, however, and those that are not will continue to form part of the estate and pass in accordance with the will or intestacy rules.

No inheritance tax is payable on pension death benefits where they pass to the deceased’s spouse or civil partner, whether as a lump sum (including inherited annuity guarantee or capital protection payments) or via drawdown. The exemption also applies where benefits pass to a charity.

Non-exempt pension death benefits paid after 5 April 2027 will be aggregated with the deceased’s other taxable assets when calculating inheritance tax.

The deceased’s personal representatives (PRs) will then need to allocate any available nil rate bands (NRBs) and residence nil rate bands (RNRBs) between the pension assets and the rest of the estate.

This allocation determines how much inheritance tax is payable by the estate and how much must be met from the pension benefits.

Example: Roger

Scenario 1: £600,000 SIPP

Roger, a widower, dies aged 73 in May 2027, leaving his estate of £1.2 million to his 3 children equally. His uncrystallised SIPP is worth £600,000 and the PSAs intend to pay this to his children in equal shares after any inheritance tax.

Roger is entitled to total NRBs and RNRBs of £1 million so the inheritance tax payable on his death is £320,000. This is attributed as £213,333 against his estate and £106,667 against his pension funds.

Provided Roger’s PRs gave the PSAs a notice to retain 50% of the pension funds to meet inheritance tax and any interest, the PSAs would still retain sufficient funds to pay their share of the inheritance tax direct to HMRC should the PRs give them such a payment notice.

Scenario 2: £1.8 million SIPP

Had Roger’s SIPP been worth £1.8 million, the position would be:

• If the PSAs intend to pay the death benefits as a lump sum, any amount exceeding Roger’s available lump sum and death benefit allowance (LSDBA) of £1,073,100 would be subject to income tax in the beneficiaries’ hands. The PRs would need to know the amount of this excess so that they can inform HMRC of the income tax to assess on the beneficiaries. This could be avoided if the death benefits are instead designated to beneficiary drawdown, where available.
• Roger’s RNRB will be lost. The total inheritance tax liability will then increase to £940,000 (£3 million less £650,000 @ 40%) and allocated £376,000 to the estate and £564,000 to the pension funds.
  The PRs need to be familiar with these procedures so that they can effectively calculate the inheritance tax and arrange for its payment.

The inclusion of notional pension assets in the deceased’s estate gives rise to a number of other issues when a pension scheme member is making or reviewing their will. These include:

• If the will includes a clause to create a nil rate band discretionary trust on death, this will need to be reviewed to determine whether it takes account of the inclusion of any notional pension assets. Some clauses refer to “the amount of nil rate band available on the deceased’s death” but others may be more specific and refer to an amount equal to the nil rate band less any amounts gifted in the last 7 years, qualifying IIPs and/ or IPDIs the deceased may be entitled to and any property subject to a reservation of benefit – notional pension assets are not mentioned and so this will need to be addressed.
• Some have made provision in their will for, say, 10% of the net general component of their estate to pass to charities on death. The inheritance tax rate on that component then drops to 36%. HMRC has confirmed that notional pension assets will be treated as part of the general component from 6 April 2027. For many, the general component part of their estate may then increase substantially, with more having to be paid as a charitable legacy and the PRs having to use other estate assets to meet this.

• If a charitable lump sum is paid from pension assets, it will be included when determining whether the “10% test” has been satisfied to apply the 36% inheritance tax rate.

  Where a will contains provisions for 10% to pass to charities, but with a cap restricting the overall amount payable, that cap may stop the 10% test being satisfied once notional pension assets are added to the general component of the estate.

  Where the will makes provision for 10% to pass to charities with no cap, larger (and unexpected) sums would be paid to the charity with this payment being satisfied from the estate and not the pension scheme (which would have its own beneficiaries). Estate beneficiaries would then receive less.
  HMRC has been made aware of these difficulties and further reforms may address some of these issues before April 2027.

• Under s144 Inheritance Tax Act 1984, an individual can execute a will under which all of their estate (but not pension assets) passes to a discretionary trust. Any appointments made out of the trust within 2 years of death are treated as made by the deceased on death. We believe that more people will take advantage of this planning so that the PRs can adopt a more flexible approach as to who benefits on the deceased’s death depending on the position regarding their pension assets.

If you, or someone you know, would like guidance on succession planning or inheritance tax matters, contact us to arrange a free initial consultation.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. The information in the article is based on current laws and regulations which are subject to change as at future legislations. 

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.

The information in this article is correct as at 26/05/2026.

The Financial Conduct Authority does not regulate tax advice, trusts, will writing or estate planning.