Pension inheritance tax: how to reduce the tax your loved ones could pay from April 2027

Published: October 16, 2026 at 10:39 AM

They won’t be exempt from inheritance tax next year – but there are moneysaving solutions, says PAUL LEWIS

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Inheritance Tax will be charged on pension funds from April next year.

Currently, any surplus left in a pension fund on death can be passed directly to heirs by the pension provider free of inheritance tax (IHT); but for any death from 6 April 2027, the whole value of any remaining pension funds will count as part of the deceased’s estate.

If the total estate exceeds the IHT-free allowance – normally £325,000 – then IHT of 40% will be due on the excess.

Guide to saving inheritance tax from Hargreaves Lansdown

Where a pension fund is passed to a spouse or civil partner it will still be free of IHT. But heirs may have to pay not just IHT but also income tax when they withdraw the money.

If the deceased dies before the age of 75 then no income tax is due, but if they were 75 or more at death then the amount an heir withdraws is added to their other income that year and income tax will be charged at 20%, 40% or 45% depending on their other income. In Scotland income tax rates of 19% to 48% apply.

So the total tax taken from an inherited pension fund could be 40% IHT plus income tax on the remainder – that works out at a total of 52% of the fund for basic rate taxpayers, 64% for higher-rate taxpayers and 67% for those paying the top rate of 45%. In Scotland it ranges from 51% to 69%.

If an heir’s income is between £100,000 and £125,140 then the effective income tax rate can be 60% (67.5% in Scotland). And where an estate is worth more than £2 million the effective inheritance tax rate can be 60%. In rare cases where both apply, total tax taken could reach 84% of the pension fund (87% in Scotland)!

Guide to saving inheritance tax from Hargreaves Lansdown

One way to avoid this tax is to spend the pension fund so there is little or nothing left. After all, the purpose of pensions is to provide for you in retirement, not to pass on to your heirs.

Alternatively, you could convert your pension fund to an income for life by buying an annuity. If that income is surplus to your needs you can pass it to your heirs while you are alive and it will not normally count as part of your estate when you die.

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If you do want to try to reduce the tax due on your pension fund when you die, always get independent financial advice.

Use the free annuity calculator from our partner Pense. Get up to 47% more from your pension savings.

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