What happens to your pension when you die? The 2027 rules explained

For most of the last decade, one of the key advantages of a defined contribution pension has been how it is treated on death. Unlike most other major assets, pension funds have typically sat outside of your estate, meaning they could be passed to your children or grandchildren largely free of Inheritance Tax.

That changes in April 2027. Following the October 2024 Autumn Budget, most unused pension funds and pension death benefits will be brought into scope for Inheritance Tax for the first time. But the picture is not straightforward. Different types of pension are treated differently. The age at which you die still matters for income tax. Some beneficiaries remain exempt. And while the planning opportunities available before April 2027 are narrowing, they have not disappeared.

This guide sets out the current rules, explains what is changing in April 2027, outlines who may be affected, what the double-tax risk really means in practice, and what steps are worth considering now.

1. The current rules

Before looking at what changes in 2027, it is worth understanding the framework that currently exists. The rules differ significantly depending on the type of pension you have and your age at death.

Why your expression of wishes matters so much

For defined contribution pensions, the pension provider or trustees have discretion over who receives the death benefits. This is what currently keeps the funds outside your estate for IHT because the benefits are not legally yours to direct; they do not count as part of your estate under current rules.

Your expression of wishes, or nomination form, is the mechanism by which you tell the trustees who you would like them to pay the benefits to. Trustees are not legally bound by it; they exercise their own discretion, but in practice, they follow it in almost all cases. This is why completing the form is critical and why keeping it updated is just as important.

2. The age 75 rule: why it matters and what it means

Age 75 is the most important threshold in pension death benefit planning, and it remains so after the 2027 changes.

The rule is straightforward: if you die before your 75th birthday, your beneficiaries can generally access defined contribution pension funds completely free of income tax, provided the funds are claimed within two years of death and within the Lump Sum and Death Benefit Allowance of £1,073,100. They can take the money as a lump sum, move it into their own drawdown account, or use it to buy an annuity, all tax-free.

If you die on or after your 75th birthday, any pension funds paid to beneficiaries are taxed at their marginal rate of income tax, whether taken as a lump sum or as drawdown income. For a higher-rate taxpayer beneficiary, that means 40% income tax. For an additional-rate taxpayer, 45%.

This has always been a significant consideration. From April 2027, it becomes even more consequential because for deaths after 75, IHT will apply on top of income tax. That is the double-tax problem.

3. What changes in April 2027

From 6 April 2027, most unused pension funds and pension death benefits will be included in the deceased’s estate for inheritance tax purposes. This applies regardless of whether pension scheme trustees have discretion over who receives the benefits; the historic mechanism by which pensions sat outside the estate no longer determines the IHT position.

What is in scope and what is not

4. The double-tax problem: what it really means

The most alarming aspect of the 2027 changes for many people is the potential for both Inheritance Tax and income tax to apply to the same pension funds. To understand how this works in practice:

There is a partial offset: beneficiaries who pay income tax on inherited pension funds can reclaim a portion of the income tax to reflect the IHT already paid on the same funds. This reduces the effective rate somewhat, but the combined burden remains substantial for larger estates and higher-rate beneficiaries.

It is also important to note that the double-tax problem does not apply in all cases. For estates that fall below the IHT threshold, even with the pension included, no IHT applies, and only the income tax rules, unchanged, are relevant. The government estimates that of around 213,000 estates with pension wealth in 2027/28, approximately 10,500 will face a new IHT charge that they would not have faced under the old rules.

5. Leaving your pension to your spouse: the second-death problem

One response to the 2027 changes is straightforward: leave everything to your spouse. Pension funds passed to a surviving spouse or civil partner remain IHT-exempt on the first death, and this exemption is maintained under the new rules.

However, this is not the end of the story. By concentrating the combined estate in the surviving spouse’s hands, including their pension and yours, the total estate on the second death may face a significantly larger IHT bill. At that point, the surviving spouse may have less capacity, energy, or opportunity to plan around it.

This is sometimes called the second-death problem, and it is one reason why planning for pension succession needs to look at both deaths rather than just the first. Using some of the window before April 2027, while the double-tax clock is not yet ticking, to implement a gifting or withdrawal strategy that reduces the combined estate is often more effective than simply defaulting to the spouse exemption on the first death.

6. What to consider doing before April 2027

For those with significant pension pots who are concerned about the impact of these changes, several strategies are worth considering. The right approach depends on your personal circumstances, overall estate, income needs, and your beneficiaries’ tax positions. All of them require careful modelling with a financial adviser before action is taken.

Review and update your expression of wishes

This costs nothing and takes minutes. Make sure your nomination reflects your current wishes and circumstances. If you have more than one pension, which is common over a working lifetime, it’s important to review each one individually.

Model the impact using cash flow analysis

Before making any decisions about drawing down faster, gifting, or restructuring, a cash flow model that incorporates the April 2027 changes should be built. This shows the projected IHT exposure on your estate with and without various interventions and identifies the strategies most likely to make a material difference in your specific situation.

Consider drawing down more strategically

For those who do not need to rely on their pension for income and have been keeping it largely untouched to pass on to family, the changes coming in 2027 may prompt a rethink. In some cases, it may be worth drawing more from the pension and using the funds during your lifetime, whether that’s through spending, gifting, or reinvesting elsewhere.

However, taking higher withdrawals can increase your taxable income in those years, potentially pushing you into a higher tax band, and may have wider implications for your overall retirement plan. This is not a decision to take lightly and should be carefully modelled, rather than based on a simple rule of thumb.

Revisit your gifting strategy

Funds drawn from a pension and gifted to children may be subject to IHT via the seven-year rule on potentially exempt transfers, but the clock starts running from the date of the gift, and if you survive seven years, the gift falls entirely outside the estate. For those with surplus pension income, the normal expenditure out of income exemption may also allow ongoing regular gifts to be made immediately outside the estate with no seven-year clock. Our companion article on gifting and Inheritance Tax explains these rules in detail.

Consider whether your nominated beneficiaries remain the best option

In some cases, it may be more tax-efficient to direct pension death benefits to grandchildren rather than children, to help reduce cumulative IHT exposure across generations. The income tax position of different beneficiaries also matters. A lower-rate taxpayer beneficiary faces a lower income tax charge on inherited pension funds than a higher-rate one. These considerations may inform how you structure your nominations.

Review the role of life assurance

For some estates, a whole-of-life insurance policy written in trust can provide a tax-free lump sum on death that beneficiaries can use to meet the IHT liability without having to sell assets or deplete the pension. This does not reduce the tax bill but addresses the liquidity challenge, which is one of the most practically difficult aspects of the 2027 changes.

Frequently asked questions

What happens to my pension when I die?

What happens depends on the type of pension you have and your age at death. With a defined contribution pension, any remaining pot can typically be passed to beneficiaries you nominate as a lump sum, drawdown income, or an annuity. If you die before 75, the funds are usually tax-free for your beneficiaries within the Lump Sum and Death Benefit Allowance. If you die after 75, beneficiaries pay income tax at their marginal rate. From April 2027 most unused pension funds will also be subject to Inheritance Tax.

Will my pension be subject to Inheritance Tax when I die?

Under current rules, before April 2027, most pension funds sit outside your estate and are not subject to IHT. From 6 April 2027, most unused pension funds and pension death benefits will be included in your estate. Benefits to a surviving spouse or civil partner remain exempt. Death-in-service benefits and dependants’ scheme pensions from defined benefit schemes are also excluded.

What is an expression of wishes form, and why does it matter?

An expression of wishes tells your pension provider or trustees who you would like to receive your pension when you die. Because trustees typically have discretion over who receives death benefits, completing this form is critical. Without it, the trustees must decide on their own, which may not reflect your intentions. It should be kept up to date whenever a major life event occurs.

What is the age 75 rule for pension death benefits?

Age 75 is the key threshold for income tax on pension death benefits. If you die before 75, beneficiaries can generally receive DC pension funds tax-free, within the Lump Sum and Death Benefit Allowance. If you die after 75, all pension death benefits are taxed at the beneficiary’s marginal income tax rate. This threshold has not changed under the 2027 reforms; what changes is that IHT will also apply from April 2027, regardless of age at death.

What is the double tax risk for pension death benefits after age 75?

If you die after age 75 on or after 6 April 2027, beneficiaries could face both Inheritance Tax at 40% and income tax at their marginal rate on the same pension funds. For a higher-rate taxpayer beneficiary in an estate above the IHT threshold, the effective combined rate can reach approximately 64%. For additional-rate taxpayers, it can exceed 87%. A partial offset applies, and beneficiaries can reclaim some income tax to reflect the IHT already paid, but the combined burden remains substantial.

Should I draw down my pension faster before April 2027?

For some people, drawing down more strategically and spending or gifting the proceeds may reduce the overall tax liability their estate will face from April 2027. However, this is not a universal recommendation. Drawing down faster increases your income and may push you into a higher tax bracket. It also affects how long your money lasts. This decision should be modelled carefully with a financial adviser before any action is taken.