From April 2027, any money left in a defined contribution pension after death will be included in your estate for inheritance tax purposes. For someone with a £200,000 pension pot and a home worth £350,000, that could mean an extra £80,000 tax bill that wouldn’t have existed under the old rules.
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This article is general information only and does not constitute professional advice. For your specific situation, consult a qualified professional.
The inheritance tax system has been quietly shifting under the feet of UK retirees. The nil-rate band has been stuck at £325,000 since 2009, while average house prices have climbed from roughly £162,000 to over £290,000. More estates are being pulled into the tax net every year without any change to the law.
The bigger shift arrives in April 2027. Defined contribution pensions — the kind most people have through workplace schemes or private pensions — will no longer pass outside your estate for inheritance tax. The government estimates around 38,500 estates will pay more tax as a result, with an average increase of £34,000. If you’re approaching retirement or already drawing a pension, this changes how you think about what you leave behind. Here’s what you actually need to know.
If you haven’t looked at your estate planning recently, a retirement readiness checklist is a sensible place to start before the rules change.
The term that matters most here is defined contribution pension — a pension where your retirement pot is built from contributions and investment growth, rather than a guaranteed income promise. Most workplace pensions and all private pensions fall into this category. From April 2027, any unused funds in these pots at death will be counted as part of your estate and taxed at 40%, just like cash or property above the threshold.
What I tend to notice is that people assume their pension is somehow ring-fenced from inheritance tax. The April 2027 change removes that protection entirely. If your estate — including your home, savings, and pension pot — exceeds the available thresholds, the tax bill lands on your beneficiaries.
The Thresholds That Decide Your Tax Bill
Three numbers determine whether your estate pays inheritance tax and how much. The nil-rate band sits at £325,000 per person. The residence nil-rate band adds up to £175,000 if you leave your main home to children or grandchildren. For married couples and civil partners, unused allowances transfer to the surviving spouse, meaning a combined total of up to £1,000,000 can pass tax-free.
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| Threshold | Single Person | Married Couple / Civil Partners |
|---|---|---|
| Nil-Rate Band | £325,000 | £650,000 |
| Residence Nil-Rate Band | £175,000 | £350,000 |
| Total allowance | £500,000 | £1,000,000 |
The residence nil-rate band tapers away once your estate exceeds £2 million, losing £1 for every £2 above that threshold. And it only applies if the property is left to direct descendants — children, grandchildren, stepchildren, or adopted children. Leave the home to a cohabiting partner or into a trust, and the allowance is lost entirely.
Here’s what that looks like in practice. Take a single retiree with a £400,000 estate — a home worth £300,000 and savings of £100,000. Under current rules, the first £325,000 is covered by the nil-rate band, and the residence nil-rate band covers the rest if the home goes to direct descendants. No tax due. Add a £200,000 pension pot to that same estate after April 2027, and the total jumps to £600,000. The tax bill on the £100,000 above the £500,000 allowance comes to £40,000. The shift from saving to spending in retirement takes on a new dimension when unused pension funds carry a potential tax charge.
Where People Get This Wrong
Assuming pensions are always inheritance-tax-free
This is the most costly misunderstanding. Currently, defined contribution pension pots pass outside your estate for inheritance tax purposes. From April 2027, they won’t. The change applies to anyone who dies on or after 6 April 2027, regardless of when the pension was built. If your estate — including your pension — exceeds the available thresholds, the 40% charge applies. The fix is straightforward: review your expression of wish form with your pension provider, and consider whether drawing down more of your pension during your lifetime reduces the pot left behind. An estate lawyer can help you understand how the change interacts with your wider planning.
Not realising the nil-rate band freeze affects you
The £325,000 threshold has been frozen since 2009. By April 2031, that will be 22 years without adjustment. Average UK house prices have risen from roughly £162,000 to over £290,000 in that period. A retiree who bought a home in the 1990s for £80,000 may now sit in a property worth £350,000 — above the nil-rate band on its own. The freeze doesn’t need a new tax to hurt; it just lets inflation and house price growth do the work. The only remedy is to plan around the frozen threshold rather than hoping it rises.
Thinking the residence nil-rate band applies automatically
The £175,000 residence nil-rate band has conditions. The property must have been your main home at some point. It must be left to direct descendants — children, grandchildren, stepchildren, or adopted children. Leave it to a cohabiting partner, a sibling, a friend, or into a discretionary trust, and the allowance is lost. The taper above £2 million catches estates that might otherwise qualify. A properly structured will is the only way to secure this allowance. The downsizing addition can preserve some or all of the relief if you sell your home and move to a smaller property, but only if the proceeds pass to direct descendants.
Gifting without tracking the seven-year rule
Potentially exempt transfers — gifts of any amount — become inheritance-tax-free only if you live for seven years after making them. Die within seven years and the gift falls back into your estate, with taper relief applying only after three years. The annual £3,000 gift exemption and small gifts of £250 per person are exceptions, but larger gifts require careful records. Many retirees give money to children for house deposits or school fees without realising the clock resets with each gift. Regular gifts out of income are exempt if they don’t affect your standard of living, but HMRC looks closely at what counts as “regular” and “out of income.”
What to Do Before the Rules Change
Review your pension nomination forms
Your expression of wish form tells your pension provider who should receive the funds if you die. From April 2027, this decision has direct inheritance tax consequences. If your nominated beneficiary is your spouse or civil partner, the pension passes tax-free under the spousal exemption. If you nominate children, grandchildren, or others, the value counts toward your estate and may trigger a 40% charge. Reviewing and updating this form takes 15 minutes with most providers — you can download it from your online account or request a paper copy. Update it after any major life event: marriage, divorce, birth of a child or grandchild, or death of a nominated beneficiary.
Update your will to coordinate with pension planning
A will that works with your pension nominations is more important than ever. The residence nil-rate band requires the home to pass to direct descendants — your will must reflect that. Charitable legacies can reduce the inheritance tax rate from 40% to 36% if you leave at least 10% of your estate to charity. Trusts can protect assets for vulnerable beneficiaries but may disqualify you from the residence nil-rate band. A solicitor who specialises in estate planning can check whether your will and pension nominations align. If you need quick guidance on a specific question, a financial adviser can help you weigh the trade-offs between different approaches.
Consider drawing pension funds or buying an annuity
One way to reduce the pension pot that could be taxed after April 2027 is to use more of it during your lifetime. Drawing down additional income, making gifts to family from your pension, or buying an annuity that stops on your death all reduce the unused balance. A 65-year-old using £100,000 to buy a basic single-life level annuity could secure around £7,800 a year, rising to roughly £8,500 at age 70 and £9,700 at age 75. The trade-off is that you lose access to the capital. For some retirees, the certainty of a guaranteed income outweighs the inheritance tax risk. For others, drawing down flexibly and gifting surplus income makes more sense.
Use gifting strategies within the rules
The annual gift exemption of £3,000 per tax year can be carried forward one year, so a couple could give up to £12,000 in a single year if neither used the previous year’s allowance. Small gifts of £250 per person per year are separate, as long as you don’t use another allowance on the same person. Wedding or civil partnership gifts are exempt up to certain limits — £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else. Regular gifts out of income, such as paying school fees or contributing to a Junior ISA, are tax-free if they don’t reduce your standard of living. Keep records of every gift, including the date, amount, and recipient, because HMRC may ask for evidence if you die within seven years.
- 1Locate your pension provider and policy detailsGather statements, online login details, and policy numbers for every defined contribution pension you hold.
- 2Request or download the expression of wish formMost providers offer this through their online portal. If not, call or write to request a paper copy.
- 3Review current beneficiaries against your willCheck that your pension nominations and your will direct assets to the same people, especially your spouse or civil partner for tax-free transfer.
- 4Consider how the April 2027 change affects your choicesIf your estate exceeds the thresholds, leaving pension funds to anyone other than your spouse may trigger a 40% charge.
- 5Complete, sign, and return the formKeep a copy for your records and note the date. Review again after any major life event or every three years.
Frequently Asked Questions
Does the April 2027 change affect defined benefit (final salary) pensions? ▾
Can I avoid inheritance tax by transferring my pension to my spouse before death? ▾
What happens if I die within seven years of making a gift? ▾
Does the residence nil-rate band apply if I downsize before death? ▾
How does the £2 million taper work for the residence nil-rate band? ▾
The April 2027 Deadline Changes Everything
The single most important date for UK retirees with defined contribution pensions is 6 April 2027. After that, unused pension pots are treated like any other asset in your estate. The planning you do now — reviewing nominations, updating your will, considering how much to draw or gift — determines whether your beneficiaries face a 40% tax bill or receive the full value of what you’ve built. Waiting until 2028 to act means the rules have already changed and the options are narrower.
Remember: this article is general information only. For advice on your specific situation, speak to a qualified professional.
If this was useful, you might also want to read Beyond the Pension Pot: Unconventional Ways to Fund Your UK Retirement.
Sources and Further Reading
Retire on Your Terms: Mastering the Art of Flexible Retirement — Practical guidance on structuring retirement income around changing tax rules and personal circumstances.
Beyond the Pension: How to Generate Passive Income in Retirement — Explores income strategies that complement pension drawdown and reduce the risk of leaving large unused pots.
WillSafe (2026). Inheritance Tax Changes 2026 UK. 🔗
Lawyer Monthly (2026). UK Pension Inheritance Tax Reforms and Probate Implications. 🔗
The Guardian (2026). UK pension inheritance tax: holiday, student loans, tax-free gifts. 🔗
