Inheritance Tax on Pensions Calculator (2027) Trending

Under the Finance Act 2026, which received Royal Assent on 18 March 2026, unused pension funds and most pension death benefits count as part of a person's estate for Inheritance Tax on deaths from 6 April 2027. Death-in-service benefits and dependants' scheme pensions stay outside. At present most defined contribution pots sit outside the estate, so beneficiaries receive them free of IHT, though income tax can apply where death occurs after 75. From 6 April 2027 most undrawn pensions will be brought inside, which is one of the larger Inheritance Tax changes in decades and reaches millions of pots.

The arithmetic then follows the usual estate rules. Where the estate including the pension exceeds the nil-rate band of £325,000, plus the residence nil-rate band of £175,000 where it applies, IHT of 40% falls on the excess. The residence band tapers away by £1 for every £2 the estate exceeds £2 million, so adding a pension can also cost some or all of it. The personal representatives are liable for the tax. They can ask the pension scheme to hold back up to 50% of the benefits for up to 15 months, or to pay HMRC directly out of the fund, so the amount beneficiaries actually receive will be lower than the pot's headline value.

The rules are now settled law, and HMRC has published guidance on how schemes and personal representatives will work together. Feed in your estimated estate value, the size of the pension pot, whether your home goes to direct descendants and anything left to a spouse or civil partner, and the calculator shows the liability under today's rules and from April 2027, including any loss of the residence band above £2 million. It does not model a transferred nil-rate band from an earlier spouse's death, which can add up to £500,000 more.

Passing everything to a spouse defers the problem rather than solving it. Transfers between spouses and civil partners are exempt without limit, pensions included, so a £1m pension left to a husband or wife at the first death attracts no IHT at all. The charge arises at the second death, when the combined assets pass to children or others, and the April 2027 rules apply to that second estate just as they do to the first. Lifetime gifting, subject to the 7-year rule, reduces what is left in it.

Several responses are being discussed. One is drawing the pension down faster, taking the 25% tax-free lump sum and regular withdrawals to reduce the balance, though the income tax on those withdrawals has to be weighed. Another is giving the drawn money away, either within the £3k annual gift allowance or under the 7-year rule. Buying an annuity takes the money out of the estate, since annuities are not counted. Some people plan to spend the pension first and leave an ISA or the family home instead, which does fall in the estate but can attract the residence nil-rate band. Trust arrangements exist for larger pots but are complicated enough to need specialist advice.

Charitable giving works differently after the change. Leave 10% or more of the net estate, measured after the nil-rate band, to charity and the IHT rate on the rest drops from 40% to 36%. Pension scheme administrators usually let you nominate a charity as a beneficiary, and once the pension counts as part of the estate from April 2027, a gift like that reduces the bill on the pension portion as well as the rest.