The Finance Act 2026 brings most unspent defined contribution pension funds within the scope of inheritance tax from 6 April 2027. For many pension holders, one of the most immediate practical questions is: what happens to my pension if I die before that date, compared to after?
Before April 2027: outside the estate
Under the current rules, defined contribution pension funds that remain unspent at death generally fall outside the estate for inheritance tax. They pass directly from the pension scheme to nominated beneficiaries — outside the normal probate process — and attract no IHT charge regardless of the size of the rest of the estate.
The income tax treatment depends on the age at death. Dying before age 75, beneficiaries can typically receive the pension funds free of income tax as well. Dying at or after 75, beneficiaries pay income tax on withdrawals at their marginal rate, but still no IHT.
This combination — outside the estate for IHT, and potentially free of income tax if death is before 75 — made the unspent defined contribution pension one of the most tax-efficient assets to preserve and pass on.
After April 2027: within the estate
From 6 April 2027, the pension is brought within the estate for IHT. The standard 40% rate applies to the pension funds above the available thresholds. The income tax rules on withdrawal by beneficiaries do not change — they remain as above, dependent on the age at death — but IHT is now charged on top.
For a pension holder who dies at or after 75, this creates a potential double charge: IHT at 40% on the pension as part of the estate, and then income tax at the beneficiary's marginal rate on withdrawals from what remains. The combined effective rate on pension funds passed to a higher-rate taxpayer can exceed 60%.
The practical impact
The change affects families differently depending on the size of the estate and the available allowances. A couple with a combined nil-rate band of £650,000 and residence nil-rate band of £350,000 can pass up to £1 million free of IHT. If the pension forms part of the estate and pushes the total above £1 million, the excess is taxed at 40%.
For those already above the IHT threshold before adding the pension, the pension funds are now effectively taxed at 40% — where they were previously outside the estate entirely.
What to do
The change in rules does not automatically mean a change in strategy is required. For those below the IHT threshold even with the pension included, the primary planning considerations remain income tax efficiency and sustainable income. For those above the threshold, the question of drawdown sequencing, pension nominations, and estate planning around the pension needs to be reviewed before April 2027.
Speaking with a regulated financial adviser who specialises in pension and estate planning is the appropriate next step for anyone materially affected by this change.