Inheritance Tax 2027: The Pension Pot Raid Explained

For decades, pensions were the ultimate estate-planning tool. They sat outside your estate, so unused pension savings could pass to your beneficiaries free of Inheritance Tax (IHT). For deaths on or after 6 April 2027, that ends: most unused pension funds and death benefits will count in your estate.

This is not a niche change. HMRC estimates that of around 213,000 estates with inheritable pension wealth in 2027/28, about 10,500 will become liable for IHT that would not have been before, and a further 38,500 will pay more - an average of roughly £34,000 extra per affected estate. The detail below is what most summaries get wrong, because the rules were refined after they were first announced.

What is in - and what is excluded

From 6 April 2027, most unused defined contribution (DC) pension pots and pension death benefits are brought into the value of your estate for IHT - even where the scheme has discretion over who receives them (the discretionary structure that used to keep them out).

But GOV.UK confirms important exclusions that consensus articles often miss:

• Death-in-service benefits paid from a registered pension scheme stay out of scope.
• Dependants’ scheme pensions from a defined benefit arrangement, or from a collective money purchase scheme, stay out of scope.
• The existing spouse / civil-partner exemption and the registered-charity exemption are maintained - a pension passing to your spouse or civil partner is still exempt, like the rest of your estate.

Who reports and pays - the part that changed

The original 2024 proposal would have made pension schemes report and pay the tax. The government's consultation response on 21 July 2025 changed that: your personal representatives (executors) are now liable for reporting and paying the IHT on your pension, working with the schemes and beneficiaries.

To fund the bill, personal representatives can direct a pension scheme to withhold up to 50% of the taxable death benefits for up to 15 months from the date of death. So beneficiaries of a taxable pot may receive half up front and the rest once the IHT position is settled - a practical wrinkle worth knowing before you assume the money arrives in full.

The "Double Drag" trap: the £2 million threshold

This is the detail most people miss. Your Residence Nil Rate Band (RNRB) - the extra £175,000 allowance for leaving your home to direct descendants - is withdrawn by £1 for every £2 your estate exceeds £2 million. Pulling a pension into the estate can push you over that line.

Previously, a couple with a £1.5m home and £400k in ISAs (£1.9m total) were under the £2m limit, so they kept their full allowances.

The pension impact: add £300k of combined pensions and the estate becomes £2.2 million:

1. They are now £200k over the taper threshold.
2. They lose £100k of their Residence allowance immediately (£1 for every £2 over).
3. They pay 40% on the pension itself.

That is the "cliff edge": adding a pension to the estate can cost more in tax than a flat 40%, because it also strips an allowance. (The RNRB is fully gone by roughly £2.35m for an individual, or £2.7m for a couple.) The IHT Planner models this against your own numbers.

Can you protect your estate?

The pension shelter is closing, but standard IHT planning still works. The nil-rate band (£325,000) and residence nil-rate band (£175,000) remain, both frozen to April 2031 (extended a further year at the Autumn Budget 2025), and a married couple can still combine allowances to pass on up to £1,000,000.

1. Spousal transfers

Transfers between spouses and civil partners remain tax-free, and GOV.UK confirms this exemption is maintained for pension death benefits. You can use it to balance your estates so neither of you individually breaches the £2m taper threshold.

2. The 7-year gifting rule

Assets gifted more than 7 years before death are generally free of IHT. For a pension surplus you will never spend, withdrawing it (paying the Income Tax - use our Pension Lump Sum Tax Calculator to see the real take-home) and gifting it early can work out cheaper than the later 40% hit. See the 7-year rule guide.

3. Spending it

It sounds flippant, but the most tax-efficient strategy is often to enjoy your money. Pensions were designed to fund retirement, not to be a tax-free inheritance vehicle. Using your pension for your lifestyle while gifting other assets may now be the optimal route.