Are pensions subject to Inheritance Tax right now?

Currently, pensions held in discretionary trusts outside your estate are generally exempt from UK Inheritance Tax (IHT). However, under draft legislation announced in the Autumn Budget 2024, unused pension funds and death benefits will be brought into scope for IHT from 6 April 2027.

What is the age 75 rule for pension death benefits?

If you die before age 75, beneficiaries can usually withdraw inherited pension funds completely free of income tax (subject to the £1,073,100 LSDBA). If you die at or after age 75, withdrawals made by beneficiaries are taxed as income at their marginal rate.

What happens to a drawdown pension when you die?

In flexi-access drawdown, your remaining pot remains invested and can be passed on to nominated beneficiaries via beneficiary drawdown, lump sums, or annuity purchases, unlike single-life annuities which typically end upon death.

Pension Death Benefits & 2027 Inheritance Tax Rules

What Happens to Your Pension When You Die?

Under current UK law, defined contribution pensions (such as personal pensions, SIPPs, and workplace master trusts) are held in discretionary trusts outside your estate. This means pension wealth can typically pass directly to your nominated beneficiaries without being included in UK Inheritance Tax (IHT) calculations or waiting for probate.

The Age 75 Rule: How Beneficiaries Are Taxed

While pensions currently remain outside IHT, the income tax treatment of inherited pension funds depends strictly on whether the pension holder dies before or after their 75th birthday:

Death Before Age 75

Beneficiaries can typically withdraw funds completely free of UK income tax, whether taken as a lump sum or drawn flexibly. Total tax-free lump sum death benefits are subject to the statutory Lump Sum and Death Benefit Allowance (LSDBA) cap of £1,073,100.

Death At or After Age 75

Any funds paid to beneficiaries are treated as taxable income. Beneficiaries pay income tax at their marginal rate (20%, 40%, or 45%) as and when they make withdrawals from the inherited pension.

The Autumn Budget 2024 Reform: Pensions in IHT from April 2027

In the Autumn Budget 2024, the UK Government announced that unspent defined contribution pension savings and pension death benefits will be brought into the scope of Inheritance Tax starting 6 April 2027.

Key Takeaway for Estate Planning: From April 2027, pension pots will no longer enjoy an automatic exemption from 40% IHT above your available Nil-Rate Bands. For beneficiaries inheriting post-age-75 pots, this introduces potential double-taxation (IHT on the estate plus income tax on subsequent withdrawals), highlighting the importance of strategic retirement decumulation.

Drawdown vs. Annuities: Estate Planning Differences

Your choice of retirement decumulation vehicle fundamentally alters how much capital is available to your family upon your death:

Flexi-Access Drawdown: Your pot remains invested in your name. Any unspent balance can be inherited by nominated beneficiaries, who can keep the funds within a beneficiary drawdown wrapper to continue tax-sheltered compounding.
Single-Life Annuities: Unless an explicit guaranteed payment period, value protection, or joint-life spouse provision was contracted at purchase, payments cease entirely upon death with £0 remaining for your estate.

Authoritative References & Legislation:

HM Treasury Autumn Budget 2024 Policy Paper: Inheritance Tax on pensions from 6 April 2027.
HMRC Pensions Tax Manual (PTM070000) — Death Benefits & The Lump Sum and Death Benefit Allowance (LSDBA).
Finance Act 2024 — Abolition of Lifetime Allowance and establishment of Lump Sum Allowance (LSA).

Impartial Guidance Notice: This article is an educational summary of UK tax legislation and does not constitute regulated financial or estate planning advice. For free, impartial guidance on pensions and bereavement, visit MoneyHelper or contact Pension Wise.

Pension Death Benefits & the 2027 Inheritance Tax Rules