The Pension and Inheritance Tax Double Whammy

Neither of these taxes is new on its own. Inheritance Tax at 40 per cent above the available thresholds has applied to estates for decades, and income tax on pension death benefits where the member dies at 75 or over has applied since the pension freedoms were introduced in 2015. From 6 April 2027, both Inheritance Tax and beneficiary income tax may apply to the same pension benefits.

This page explains what that combination means, works through a fully labelled illustrative example, and sets out who may want to review their pension nominations and wider estate plan before the change takes effect. It complements our wider article on reviewing a retirement income plan for the 2027 changes, and it does not recommend a product or a course of action — the right response depends entirely on individual circumstances.

What is the double whammy?

Until 5 April 2027, most unused defined contribution pension funds and death benefits fall outside a person's estate for Inheritance Tax, regardless of the member's age at death. From 6 April 2027, under the Finance Act 2026, most unused pension funds and pension death benefits are brought within the value of the estate for Inheritance Tax, in the same way as other assets.

Separately, and unaffected by this change, the income tax treatment of pension death benefits has long depended on the member's age at death:

• Where the member dies before age 75, a beneficiary can usually draw the pension free of income tax, whether as a lump sum or through drawdown.
• Where the member dies at or after age 75, a beneficiary pays income tax at their own marginal rate on whatever they draw from the pension.

Before April 2027, a death after age 75 meant an income tax charge, but no Inheritance Tax on the underlying fund. From April 2027, a death after age 75 can mean both — Inheritance Tax on the fund first, and then income tax on what the beneficiary draws from what is left. That combination, rather than either tax on its own, is what is commonly referred to as the pension and Inheritance Tax “double whammy”.

How the two taxes can interact

Where Inheritance Tax is due on a pension fund, HMRC's technical note describes the scheme administrator deducting the Inheritance Tax before benefits are paid out, so that the beneficiary's subsequent income tax is charged on the pension benefits net of the Inheritance Tax already paid. In other words, the two taxes are generally expected to apply one after the other, on a reducing amount — not simply added together as a single combined percentage.

That sequencing matters for how large the combined effect can be, and it is the basis for the illustrative example below.

A £1 million pension: a worked illustration

The figures below are a simplified, illustrative example to show how the two taxes can interact. They are not a forecast, a guarantee, or a description of what will happen to any particular pension or estate. Every figure depends on the assumptions stated, and every assumption may not apply to a given client.

On these assumptions, the combined effective rate of tax is 67 per cent (£670,000 of tax on a £1,000,000 fund) — not 40 per cent plus 45 per cent, which would overstate the position. The two taxes are applied sequentially: Inheritance Tax first, reducing the fund from £1,000,000 to £600,000, and income tax second, applied to that reduced £600,000 rather than to the original £1,000,000.

This 67 per cent figure is illustrative only and does not apply universally. A different outcome — higher or lower — could result depending on the beneficiary's actual marginal income tax rate, whether the beneficiary is a spouse or civil partner, how the pension benefits are structured and owned, what other Inheritance Tax exemptions, reliefs or nil-rate bands are available to the wider estate, how and when benefits are drawn, and the tax rules actually in force at the date of death.

Who may need to review their position?

This is not a situation that affects every pension holder, and there is no fixed wealth threshold below which it can be ignored or above which it necessarily applies. The type of person who may want to review their pension nominations and wider estate plan includes someone who:

• is aged 75 or over, or is planning ahead for later life
• holds substantial unused defined contribution pension savings
• expects some or all of their pension death benefits to pass to adult children or other beneficiaries who are not a spouse or civil partner
• has sufficient other assets or income, and expects to leave much of their pension untouched during their lifetime
• has not reviewed their pension nominations or wider estate plan since the Finance Act 2026 changes were confirmed

None of these factors on their own determines what, if anything, should change. They are a starting point for a conversation, not a checklist for action.

Important exceptions and qualifications

• The Inheritance Tax changes are due to apply from 6 April 2027, under legislation contained in the Finance Act 2026. Some of the detailed operation of the rules is still being finalised.
• Not every pension fund and not every estate will be affected. Whether Inheritance Tax is due at all depends on the size of the whole estate against the available nil-rate bands, not on the pension in isolation.
• Death-in-service lump sum benefits, payable only because the member was employed immediately before death, are excluded from the new Inheritance Tax charge.
• Transfers to a surviving spouse or civil partner who is a long-term UK resident can benefit from the Inheritance Tax spousal exemption, in the same way as other assets. The exemption generally defers rather than removes the eventual Inheritance Tax position — see our article on the spousal exemption and pension IHT after 2027.
• The income tax treatment of death benefits depends on the member's age at death and the beneficiary's own circumstances, including their marginal rate of income tax and how they choose to draw the benefits.
• Tax rules, thresholds and their implementation may change, including between now and 6 April 2027.

Questions to discuss with an adviser

Peter Rose

Peter Rose is a financial planner at Aetas Wealth, advising private clients, families and business owners across the UK on retirement and later-life financial planning. His work includes helping clients think through pension death benefit nominations, the order in which assets are drawn in retirement, and how pension, investment and estate planning fit together as the rules change.

peter.rose@aetas-wealth.com

Official HMRC information

The change described on this page follows the Finance Act 2026. For the government's own account of the rules — including which pension and death benefits are included, which are excluded, and how the existing exemptions apply — see:

• HMRC's technical note: Inheritance Tax on pensions
• HMRC's policy paper: Inheritance Tax on unused pension funds and death benefits