Inheritance Tax and your pension

‘Your estate’: everything you own when you die (your home, savings and investments, and from April 2027 what is left in your pension).

‘Nomination of beneficiaries (also called an expression of wishes)’: the form that tells us who you would like your pension paid to when you die.

‘Tax-free cash (also called your tax-free lump sum)’: the part of your pension you can usually take without paying tax, normally up to 25%. The two names mean the same thing.

‘Drawdown’: leaving your pension invested and taking money from it as you need, rather than buying a guaranteed income (an annuity). Money you have not taken still counts as part of your pension.

‘Nil-rate band’: the amount of your estate that is tax-free (currently £325,000).

‘Executors (or personal representatives)’: the people who deal with your estate after you die.

From 6 April 2027, the value remaining in your pension when you die is brought into your estate, and Inheritance Tax is then worked out on the estate as a whole. What matters is simply what is left in your pension when you die, added to everything else you own.

When does it the change apply? The change applies if you die on or after 6 April 2027. The law is in place (Finance Act 2026).

What exemptions are kept? Anything passing to a husband, wife or civil partner, or to a charity, stays free of Inheritance Tax (gov.uk). Income Tax is separate and is not changing, and your tax-free cash in your lifetime is not affected.

Who deals with it? Your executors work out and report any Inheritance Tax. As your pension administrator, we support that process.

Do the April 2027 changes apply to me? It depends on the total value of your estate (everything you own, and from April 2027 what is left in your pension) compared with the ‘tax-free thresholds’.

The tax-free thresholds

• The first £325,000 of your estate is tax-free. This is the nil-rate band (gov.uk).
• This can rise to £500,000 if you leave your main home to your children or grandchildren and your whole estate is worth less than £2 million. The extra amount (up to £175,000) is sometimes called the residence nil-rate band (gov.uk: passing on a home).
• When the first of a married couple or civil partners dies, anything left to the survivor is free of Inheritance Tax, and the survivor also inherits any unused allowance. This can give the surviving partner a tax-free threshold of up to £1 million before Inheritance Tax applies on their death.
• Anything you leave to a husband, wife, civil partner or charity is free of Inheritance Tax, whatever the amount.
• Inheritance Tax is normally 40% on the value above the available thresholds

For many of our customers this is a real consideration. Around half of our members have a pension worth more than £325,000, which on its own is at or above the standard tax-free threshold, before the rest of their estate is counted.

If the total value of your estate, including what is left in your pension, is below the available thresholds, there is unlikely to be Inheritance Tax on your pension. If it is above, some Inheritance Tax may be due. A regulated financial adviser can help you work out your own position.

What counts towards your estate, and what does not

If your SIPP or SSAS holds commercial property

Many of our members hold commercial premises, land or other less liquid assets inside a SIPP or SSAS. From 6 April 2027 the value left in the pension counts towards the estate like any other asset. Because Inheritance Tax has a payment deadline, an asset that cannot be sold quickly needs more thought about how any tax would be met. The detail of how tax due on a pension will be paid is still being finalised by HMRC. As your administrator we cannot give advice, but we will support you and your adviser with factual information about your scheme.

Two simple examples

This change is about how pensions are treated for Inheritance Tax when you die. It does not change the value of using a pension to save for your own retirement: pensions remain a well-established and tax-efficient way to do that, and the tax relief on contributions and the tax treatment of your pension in your lifetime are not affected.

It is rarely wise to make sudden changes to a pension because of a tax change that is still being finalised, and taking money out can create other tax to pay. If your pension forms part of how you intend to pass on wealth, the most useful step is to review your plans with a regulated financial adviser, and there is time to do that before April 2027.

InvestAcc administers your pension; we do not provide financial, tax or estate-planning advice. If you would like advice about how these changes may affect you personally, you should speak to a regulated financial adviser who can consider your individual circumstances and objectives. If you do not have a financial adviser, the Government-backed MoneyHelper service provides free and impartial guidance about pensions, retirement and later-life planning, and can help you understand the options available to you before seeking regulated advice.