Short answer: today a defined-contribution pension you have not spent passes to your family outside inheritance tax. From 6 April 2027 it is inside your estate. For anyone whose home and savings already use up the allowances, that means 40% of the pension is lost to inheritance tax — and if you die at 75 or over, the person who inherits it pays income tax on top when they draw it.
Who this affects
- Anyone with a defined-contribution pension (a personal pension, SIPP, workplace money-purchase scheme) and an estate that is already over, or near, the allowances.
- Couples less immediately: a pension left to a spouse or civil partner is exempt, as everything between spouses is. The bill arrives on the second death.
- Not defined-benefit pensions, which pay an income rather than leaving a pot.
How much it can cost: the double tax
Suppose a pension of £400,000 is left to a child by someone who died at 78, with the rest of the estate already above the allowances.
| £ | |
|---|---|
| Pension in the estate | 400,000 |
| Inheritance tax at 40% | −160,000 |
| Left in the pension for the child | 240,000 |
| Income tax when drawn, at the child's 40% rate | −96,000 |
| Child receives | 144,000 |
That is an effective rate of 64%. Before April 2027 the same pension passed with only the income tax — £240,000 to the child. Under 75 at death, there is no income tax and the effective rate is 40%.
What people are doing about it
None of these is right for everyone, and none is advice; they are the levers the planner lets you test.
- Spending the pension first and leaving ISAs and cash for later — the opposite of the usual order. Money Horizon's Which order to draw the money chapter shows what each order does to lifetime tax and to what heirs receive.
- Drawing more than you need and giving it away — regular gifts out of surplus income are exempt immediately; lump gifts fall out of the estate after seven years. The safe amount to give shows what you can give without hurting your own retirement, even in a poor decade.
- Taking the tax-free cash and giving it — 25% of the pot up to £268,275 comes out tax-free; a gift of it starts the seven-year clock.
- Naming a spouse on the pension's expression-of-wish form, so the first death is exempt and the pension keeps growing tax-free until the second.
- Buying an annuity with part of the pot: a joint-life annuity provides for the survivor and takes that money out of the estate calculation altogether.
- Life cover written in trust to pay the bill, so the family is not forced to sell.
Money Horizon models the change on the date it happens. A person who is 60 today sees the estate chart jump in 2027 and can test each of the levers above against both their retirement and their family's inheritance.
Questions people ask
When exactly does the change start? For deaths on or after 6 April 2027. Deaths before that date are under the old rules, where unused pensions are outside the estate.
Does it affect my spouse? A pension passing to a spouse or civil partner is exempt from inheritance tax, like everything else between spouses. The tax falls on the second death, unless the survivor spends or gives the money away in time.
What about income tax on an inherited pension? Unchanged: if the person who died was under 75, the beneficiary draws it tax-free; at 75 or over, withdrawals are taxed as the beneficiary's income. The inheritance tax comes on top.
Should I take my pension out now to avoid it? Taking money out is taxed as income now and the money then sits in an estate that is also taxed. It only helps if you give it away in time or spend it. The planner shows the whole chain — income tax now, inheritance tax later, what the family gets — so you can compare rather than guess.
Is this definitely happening? It is legislated (Finance Act 2025) and Money Horizon's rules carry the date. Rules can change; the planner's assumptions page shows which rule set it is using.