There’s a question we’re hearing more than almost any other at the moment:
” What happens to my pension when I die, now that the rules are changing? “
It’s worth answering properly, because the headline version rarely tells you what actually happens next.
For as long as most of our clients have been building a pension, one thing has stayed reliably true: money left in a pension when someone died usually passed to their family free of inheritance tax. It’s been one of the quiet reasons people have kept adding to a pension even after they’ve stopped needing the income. We’ve built plans around that assumption for years.
That’s changing, and it’s exactly the sort of change we exist to plan around.
What’s happening
From 6 April 2027, most unused pension funds and pension death benefits will be counted as part of a person’s estate for inheritance tax purposes.
It became law when the Finance Act 2026 received Royal Assent in March 2026.
It applies to deaths on or after 6 April 2027.
A pension pot left untouched, precisely the pot many of our clients have been careful to preserve rather than draw down, will now be added to everything else in the estate: the house, the savings, the investments.
Where the total sits above the available nil-rate bands, the pension element can attract inheritance tax at the standard 40% rate.
What it looks like in practice
Take a simple, illustrative example.
Someone dies leaving a house and cash worth £600,000, and a pension pot worth £400,000 that’s never been touched. Together, that’s a £1 million estate – £500,000 above the combined nil-rate bands.
The tax bill: £500,000 × 40% = £200,000.
The split: the tax isn’t simply taken from whichever asset is easiest. It’s apportioned proportionally, based on each part’s share of the total estate. Here, the house and cash make up 60% of the estate, and the pension makes up 40%. So £120,000 of the tax is payable from the house and cash, and £80,000 from the pension.
Under today’s rules, none of this applies – the pension sits entirely outside the estate, and only the house and cash are tested against the nil-rate bands. From April 2027, the pension joins that same calculation, and its share of the tax bill follows it.
How the pension’s share gets paid
This is where it gets genuinely practical. There are two ways the £80,000 attributable to the pension can be settled:
Direct Scheme Payment. The executors instruct the pension scheme administrator to pay the £80,000 straight to HMRC from the pension pot itself.
Beneficiary Settlement. The beneficiaries settle their £80,000 share themselves – from their own funds, or from the wider estate.
Which route makes sense depends on the family’s circumstances: whether the beneficiaries would rather keep the pension pot intact and pay from elsewhere, or let the pension cover its own share. Either way, it’s a decision worth understanding before it has to be made in a hurry.
What hasn’t changed
The following remain exempt:
Money passing to a spouse or civil partner
Anything left to a registered charity
Death-in-service benefits
Dependants’ scheme pensions
And it’s worth being clear, in HMRC’s own words: most estates will not have an inheritance tax liability at all.
There’s also a second layer worth knowing about. If someone dies at 75 or over, pension death benefits can also be subject to income tax at the beneficiary’s marginal rate – on top of any inheritance tax now due. It’s this combination, rather than either tax in isolation, that changes the maths for some families.
What happens, practically, when someone dies
This is a change in process as much as tax.
Executors (personal representatives) become responsible for reporting and paying any inheritance tax due on the pension element, working alongside the pension scheme administrator.
Once a pension’s value is confirmed to a beneficiary, that beneficiary becomes jointly responsible for the tax alongside the executor.
A new Pensions Direct Payment Scheme allows tax to be paid straight from the pension fund to HMRC.
Executors can ask a scheme to hold back up to half of a beneficiary’s entitlement, for up to fifteen months after the death, while values are worked out.
This matters because pension death benefits typically don’t sit inside a will, so they can be easy to overlook in the rush of the first few weeks. Executors will need to know a pension exists at all before any of this can happen.
How we help
This is the kind of change a WealthSpan™ plan is built to absorb. Whatever your own pension picture looks like, it’s one more piece we bring into the whole plan rather than treat in isolation.
Practically, that means we:
Make sure your expression of wishes and any relevant paperwork are current
Confirm that whoever handles your estate knows what exists and where
Revisit the numbers well before 2027, rather than leaving them to be discovered afterwards
It’s not something a blog post can answer for you, because the right approach depends entirely on your own circumstances – but it is exactly what a review with us is for.
We don’t wait for April 2027 to have this conversation. It’s already part of how we review pensions with clients now, quietly, well ahead of the deadline, so there are no surprises when it arrives.
If it’s on your mind, raise it at your next review. If you’d rather not wait, contact us.
Risk warnings
This is general education, not personal advice. It doesn’t take account of your own circumstances, and nothing here is a recommendation to change your pension, your will, or how your estate is arranged.
Tax treatment depends on your individual circumstances and on current legislation, both of which can change. The rules described here reflect the law as it stands today and may be updated before April 2027.
The £1 million estate example is for illustration only, to explain how the tax is calculated and split. It is not a calculation of your own estate, and your own figures may look very different.
References to inheritance tax rates, nil-rate bands, and settlement options are for illustration only, to explain how these rules commonly work. They are not advice on your own estate or tax position.
Wells Gibson is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 731027).
