Your pension may be one of the largest assets you own, designed to provide you with financial stability throughout your life after work. But what happens to your hard-earned pension when you die?

The answer can be complex, and misconceptions abound.

With changes to the Inheritance Tax (IHT) treatment of unused pension funds – and some pension death benefits – due to come into force from April 2027, understanding the rules is more important than ever.

Current rules allow unused pensions to be passed on tax-free in some circumstances

Unused pension funds have previously been outside the scope of IHT, and this remains the case until 6 April 2027.

Under current rules, your unused pension funds can be passed to your chosen beneficiary tax-free on death before age 75. On death after 75, your unused funds can still be passed on, but Income Tax is payable at the highest rate your beneficiary pays.

While many pensioners believe that their pension wealth will automatically pass to a spouse or partner when they die, this isn’t the case. Rather than nominating a pension beneficiary via your will, you must do so using an Expression of Wish form available from your pension provider.

These rules have previously made pensions an invaluable part of many estate plans, and you might have been hoping to leave some pension wealth untouched to pass on tax-efficiently when you die.

This strategy may now need to be revisited.

New rules from April 2027 could require a change to your estate plan, but only if IHT is likely to apply

From April 2027, most unused pension funds and some pension death benefits will fall into scope for IHT. This doesn’t automatically mean your estate will pay IHT on your pensions, but if you are close to certain IHT-free thresholds, the addition of your pension value could tip you over.

On death, IHT is generally applied at 40% to the value of your estate that exceeds the nil-rate band. This stands at £325,000 in 2026/27 and is frozen at that amount until at least 2031. Any unused nil-rate band can be passed to your spouse or civil partner on death. You can also transfer unused residence nil-rate band, an IHT allowance that applies only if you leave your main residence to a direct descendant.

Your surviving spouse or partner could therefore have an IHT-free allowance of £1 million.

It’s worth noting here that the residence nil-rate band tapers for estates worth £2 million or more, by £1 for every £2 over this £2 million threshold.

Only a relatively small fraction of UK estates pays IHT, but the number will grow over the next few years as frozen allowances meet rising estate values. For this reason, checking in with your plans now might be a good idea.

New rules add a layer of complication, but expert financial advice can help

Under the new rules, a personal representative will be appointed upon your death, whose job it is to value your estate, including any unused pension benefits. This representative may well be a relative, and so will be gathering this information at an already emotional time. What’s more, they’ll have just six months to do so.

If IHT is due on an estate that includes pension benefits, the personal representative will have to decide how it is paid. The tax bill might be settled using non-pension funds or a payment notice issued to a registered pension scheme administrator. Or the named pension beneficiary might take their full entitlement and liaise directly with HMRC to pay the IHT due directly.

Whatever option your personal representative chooses, they’ll need to remember existing rules regarding Income Tax, which remain post-April 2027. Death after age 75 could see beneficiaries liable to IHT and Income Tax on any inherited amount.

This could push tax bills much higher than expected, which is where careful financial planning can make an important difference, helping to mitigate the impact of changes and potentially lower a bill.

Get in touch

While it’s undoubtedly true that upcoming changes will require a rethink for some regarding their retirement and estate planning, your financial plan is robust and adaptable enough to cope. Please contact us if you have any questions regarding the new rules, as de Mellow’s expert financial planners are on hand to help.

Remember, too, not to act based on anything you might read in this article. All content is based on our understanding of HMRC legislation, which is subject to change.

SJP Approved 15/10/2026