What happens to my pension when I die — will my family pay inheritance tax on it?

Under the rules that apply until April 2027, unused pension funds are generally paid outside your estate, which means they are not subject to inheritance tax (IHT). If you die before age 75, your nominated beneficiaries typically receive the funds free of income tax as well. If you die at 75 or older, beneficiaries pay income tax at their own rate on withdrawals, but still no IHT. This has made pensions one of the most widely used estate planning tools in the UK.

From 6 April 2027, the rules change significantly. Unused pension funds will be brought inside the estate for IHT purposes. IHT is currently charged at 40% on the portion of an estate above the available nil-rate band (the tax-free threshold, which is £325,000 for most people, potentially higher with other allowances). HMRC estimates around 38,500 estates will pay more IHT than before as a result of this change, with an average increase in liability of around £34,000 per affected estate.

What this means in practice is that pension wealth held unspent at death could face both income tax on beneficiary withdrawals and IHT on the estate — a potential double tax charge that did not exist before.

Because this change affects how much pension you draw, in what order you spend different assets, and how you structure nominations, the picture is different for every family's circumstances. A regulated financial adviser can review your specific situation and explain the options available to you.