The Fine Print UK · PUBLISHED 19 JUL 2026 · VERIFIED 19 JUL 2026 · UK EDITION

Pension Inheritance Tax 2027: £160,000 to HMRC

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A £400,000 unused pension could hand £160,000 to HMRC if it falls into inheritance tax at the standard 40% rate, and the government says these rules apply from 6 April 2027.

The number that matters

The central number is £10,500: the government estimates that about 10.5K estates will newly face an inheritance tax charge in 2027–28 because of the pension changes.

How it quietly costs you

The first money leak is that unused defined contribution pension savings will be pulled into the taxable estate from 6 April 2027, so pension wealth that was previously outside IHT can now be taxed at up to 40% if the estate crosses the threshold. The current main IHT threshold is the £325,000 nil-rate band, with a possible £175,000 residence nil-rate band when a home is left to direct descendants. Old vs better: under the current rules, many unused pension funds can pass outside the estate; from 2027, those same funds are counted in the estate for IHT purposes.

The second, compounding trap

The second layer is the freeze of IHT thresholds, which the government has said will continue until April 2030, while pension wealth is being brought into scope. That means inflation and asset growth can push more estates over the threshold even if the owner’s spending does not change, increasing the chance that pension money is taxed at 40%. In practical terms, a person whose estate rises above £325,000 can see more of their pension taxed simply because the threshold is not rising with wealth growth.

What this looks like in practice

Persona: Mark, 58, London project manager, earns £72,000 a year, has a £410,000 defined contribution pension, owns a home, and expects to retire at 67.

• Discovery 1: Mark learns that if his pension stays unused and his estate exceeds £325,000, the pension can be included in IHT and taxed at 40% from 6 April 2027. Compared with the old rule, that is the difference between a likely tax-free pension legacy and a possible £164,000 tax hit on a £410,000 pot.
• Discovery 2: Mark learns the government expects only about 10,500 estates to newly pay IHT in 2027–28, but that still leaves roughly 213,000 estates with pension wealth in scope of the new rules. Compared with “most estates won’t be affected,” the benchmark is that a meaningful minority with larger pensions will be.
• Discovery 3: Mark learns the IHT threshold is frozen until 2030, so doing nothing can make his taxable estate more likely to cross the line over time. Compared with a rising threshold, a frozen £325,000 allowance makes future tax exposure larger even if his lifestyle is unchanged.

The full cost of doing nothing

For Mark, the combined impact of Problem 1 and Problem 2 is that a £410,000 pension could face up to £164,000 of IHT if his estate is above the threshold, and threshold freeze can increase the odds of that outcome over time. This uses the simple model that the full pension is included in the estate and taxed at 40% above the relevant allowance; it does not assume any spouse exemption or charitable exemption.

What to do about it

• Check your estate value using HMRC’s inheritance tax guidance and your own records, then estimate whether your estate plus pension exceeds £325,000.

1. Add up property, savings, investments, and pension funds.
2. Subtract debts.
3. Compare the total with the nil-rate band and, if relevant, the residence nil-rate band. Good looks like a total below the available threshold, or a clear plan for anything above it.

• Review pension death-benefit nominations in your pension provider’s online portal and confirm who receives the money.

1. Log in to your pension account.
2. Find the “beneficiaries,” “nomination,” or “expression of wish” section.
3. Update it if your family or tax plan has changed. Good looks like up-to-date nominations and a documented plan for spouse, children, or charity where appropriate.

• Model the tax hit using MoneyHelper and HMRC inheritance tax guidance, then compare leaving the pension untouched versus drawing more down during life.

1. Estimate pension value at death.
2. Apply the 40% IHT rate above the threshold.
3. Compare that with a drawdown plan or gifts strategy. Good looks like a forecast showing whether pension withdrawals now reduce a likely 40% estate tax later.

A myth worth clearing up

Myth: “Pensions are always inheritance-tax free.” Fact: From 6 April 2027, most unused pension funds and pension death benefits will be brought into the deceased’s estate for IHT purposes, so they can be taxed at up to 40% if the estate exceeds the allowance.

Sources

• UK Government
• HMRC

Researched 2026-07-19.

Corrections & disclosure: an AI-assisted, human-reviewed guide. Every figure is dated and sourced above. Spot something out of date or wrong? Tell us and we’ll correct it — corrections are noted here and in the video description.