Defined contribution pensions and inheritance tax: what the April 2027 change means for executors and beneficiaries

From 6 April 2027, the pension savings a person has not yet taken will be included in their estate for inheritance tax purposes when they die. This is a fundamental change to how defined contribution pensions are treated on death, and it creates new responsibilities for executors that did not previously exist.

Until April 2027, DC pension pots held in trust fall outside the estate for inheritance tax and are not included in the IHT calculation at all. From April 2027, any undrawn pension, along with most lump sum death benefits, will be counted as part of the estate, subject to the standard 40% inheritance tax rate where the estate exceeds the available nil-rate band. The change applies to all deaths on or after 6 April 2027, regardless of when benefits are actually paid.

This guide explains what executors need to do differently, which pension types are affected, which benefits remain exempt, and how the tax is calculated and collected. It covers the position for beneficiaries too, including the double taxation question that arises when both income tax and inheritance tax may apply to the same pension pot.

Who this change affects

The April 2027 change is most significant for estates where the deceased held a sizeable DC pension that they had not yet drawn down, or where the combination of the pension and other assets pushes the total estate above the nil-rate band threshold.

If the total estate, including the pension, would not exceed the available nil-rate band (currently £325,000, with a further £175,000 residence nil-rate band in some cases), no inheritance tax is owed and the change has no practical impact. The nil-rate band freeze runs until April 2031.

Where the estate is above the threshold, the pension pot significantly increases the taxable estate. A £200,000 pension added to a £400,000 estate of property and savings changes the IHT calculation substantially. It also changes the executor's workload: they now have to identify all pension schemes, request formal valuations, and include those valuations in the IHT account.

Which pensions are affected

The change covers registered pension schemes, which includes most workplace and private DC pensions, as well as qualifying non-UK pension schemes for long-term UK residents and certain other pension arrangements. In practice, this means:

Defined contribution occupational pensions (most private sector workplace pensions), included.

Personal pensions and self-invested personal pensions (SIPPs): included if there are funds remaining at death.

Drawdown pensions where the deceased was in the drawdown phase but had not exhausted the fund, included for the remaining pot.

Defined benefit occupational pensions, where a lump sum death benefit is paid, the lump sum is included. Dependant's pensions continuing to be paid are not included (see below).

Overseas pension schemes: included for individuals who are long-term UK residents, though the withholding and payment notice mechanism cannot be used with non-UK schemes, which adds complexity.

Defined benefit pension income that continues paying to a surviving spouse or dependant (a dependant's scheme pension) is excluded from the IHT calculation. The scheme pension itself is not a lump sum and does not vest in the estate.

What remains exempt

Several pension-related benefits are explicitly excluded from the new IHT calculation:

Dependants' scheme pensions: a pension continuing to pay to a surviving spouse, civil partner or dependant through the scheme is not included in the estate.

Death in service lump sums: where the member was still employed and working at the time of death, these lump sums remain outside the new rules. If the member had retired or left the employer, the position is different and the benefit may be included.

Joint life annuities purchased using a lifetime annuity, where the deceased purchased a joint annuity and it continues paying to the surviving partner, this is excluded.

Trivial commutation payments: small payments that convert pension income into a lump sum within the trivial commutation limits are excluded.

If you are dealing with a death where the pension involves any of these benefit types, you will need to establish the exact nature of the benefit. This is not always straightforward with older pension schemes, and contacting the scheme directly is the starting point.

What executors must do from April 2027

Before April 2027, executors dealing with a death that involves a DC pension would typically contact the pension scheme to identify the nominated beneficiaries and let the trustees decide how to distribute the fund. The pension sat outside the estate entirely.

From April 2027, the executor's responsibilities extend to the pension. You will need to:

Identify all pension schemes. This includes all registered pension schemes the deceased was a member of, including schemes from previous employment. The Pension Tracing Service helps locate pension schemes where the deceased cannot remember which providers they used. Contact each scheme and inform them of the death.

Request a formal valuation from each scheme. Pension scheme administrators are required to provide a valuation within 28 days of a request from the personal representative. The valuation for DC schemes is the value of the undrawn pot plus any augmented amounts the scheme would reasonably expect to pay as death benefits. For DB schemes, the valuation includes lump sum death benefits and any continuation payments under guarantees. Provide the scheme with the death certificate, evidence of your authority as personal representative, and a signed declaration.

Include pension valuations in the IHT account. The total value of all qualifying pension property must be reported on the IHT400 alongside all other estate assets. Pension wealth is treated as part of the estate for the purposes of calculating whether IHT is owed and at what level. The GOV.UK technical note on IHT on pensions sets out the precise rules.

Meet the IHT payment deadline. Inheritance tax is due by the end of the sixth month after the month of death. Interest accrues on unpaid tax from that point. Because pension valuations take up to 28 days, and locating all pension schemes can take weeks, starting the pension identification process immediately after death is not optional if you want to meet the deadline. An accurate estate valuation must include pension values before the IHT return is filed.

Act if benefits may be withheld. Where IHT is expected to be due on a pension benefit, the personal representative can issue a withholding notice to the pension scheme administrator. This instructs the scheme to withhold up to 50% of the non-exempt, non-excluded benefits until the IHT is paid. The notice must be issued within 15 months of death and must be withdrawn once the tax is settled. This mechanism is designed to prevent benefits being paid to beneficiaries before the tax liability is cleared.

How the tax is calculated and collected

The pension scheme administrator plays a central role in the new collection process. Once notified of a death, the administrator must:

• Provide a valuation to the personal representative within 28 days

• Identify which benefits are exempt and which are not

• Acknowledge any withholding notice within 14 days

The personal representative remains responsible for filing the IHT account and paying any tax due. However, once benefits vest in beneficiaries, joint and several liability applies, the beneficiaries share responsibility with the personal representative for any IHT attributable to the pension property they received.

If further pension assets are discovered after the estate has been administered and distributed, the personal representative can file an amended IHT account. This is important where pension tracing turns up a scheme that was not identified at the time of the original IHT filing.

Note that the rules for deaths before 6 April 2027 are unchanged. If someone dies before that date, the pension falls outside the estate for IHT purposes regardless of when the pension scheme actually pays out the benefits.

The double taxation question

One of the most significant concerns about the April 2027 change is that pension benefits can be subject to both inheritance tax and income tax. The position depends on the member's age at death and how much of the lifetime allowance was used.

Where a member dies under 75 and the lump sum allowance has not been exceeded, the death benefit is free of income tax for the beneficiary, but inheritance tax will apply from April 2027 where the estate exceeds the threshold.

Where a member dies at 75 or over, any pension benefit paid to a beneficiary as income or as a lump sum is subject to income tax at the beneficiary's marginal rate. From April 2027, the pension pot is also included in the estate for IHT before any payment is made. This means both taxes can apply to the same fund.

To prevent a fully punitive outcome, the legislation includes a mechanism for reducing the income tax liability by the amount of IHT paid on the same pension property. In practice, this means the effective combined rate is not simply 40% IHT plus 40% income tax applied in sequence. A beneficiary who receives income from a drawdown pension that was subject to IHT can reduce their income tax by the proportion of IHT attributable to those payments. The precise mechanics are complex and depend on the tax positions of both the estate and the individual beneficiary.

Professional advice from a tax adviser or solicitor who specialises in estate work is strongly recommended in any case where the pension value is substantial, the member was over 75 at death, or there is a question about whether the benefit is exempt. The HMRC notification process for the estate's tax affairs is a separate step that runs alongside the pension IHT process. [Placeholder link, article published simultaneously]

How this sits alongside existing pension death rules

The April 2027 change does not alter how DC pension benefits are identified and distributed to beneficiaries, scheme trustees still exercise discretion over who receives the fund, and the deceased's expression of wishes (nomination form) still guides that decision. What changes is the IHT treatment of the fund itself before distribution.

For more detail on the underlying rules about what happens to a pension when someone dies, including the under-75 and over-75 distinction for income tax, what happens to defined benefit pensions, and how to trace a pension scheme, the pension death benefits guide sets this out in full.

Executors dealing with a pension that is subject to the new rules will also need to understand the executor's full duties and the grant of probate process, since probate is required before the estate can be distributed and the pension IHT must be settled as part of that process. The probate application fee is currently £526.

Legacy Trail supports families in identifying financial accounts, pensions and investments held by a deceased person, including tracking down pension schemes from previous employment that may not be immediately obvious.

For free guidance on inheritance tax and pension death benefits, MoneyHelper is a good starting point. Citizens Advice can help with understanding the broader estate process. Royal London has a clear plain-English explainer on the 2027 pension changes from a financial planning perspective.

This is a significant change to UK tax law and the rules may be further clarified or adjusted by HMRC guidance before the April 2027 effective date. Anyone dealing with an estate where pensions form a material part of the assets should seek specialist advice rather than relying solely on publicly available guidance.