Pension IHT Calculator (April 2027 Reform)
From 6 April 2027, most unused pension funds + pension death benefits are brought into the deceased's estate for Inheritance Tax. This calculator models the £ impact vs the pre-reform position (zero IHT on pension).
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April 2027 pension IHT reform - the rules
- From 6 April 2027 most unused pension funds + pension death benefits are brought within the value of the deceased's estate for IHT (per HMRC technical note).
- Applies regardless of whether scheme administrators / trustees have discretion over payment of death benefits.
- Excluded: death-in-service benefits payable from a registered pension scheme + dependant's scheme pension from a defined benefit arrangement or collective money-purchase arrangement.
- Personal representatives (not pension scheme administrators) are liable for reporting + paying any IHT due on unused pension funds.
- Per HMRC's Reforming Inheritance Tax consultation response: around 213,000 estates will hold inheritable pension wealth in 2027/28. Of these, 10,500 estates will have an IHT liability where previously they would not; approximately 38,500 will pay more IHT than would previously have been the case. Average IHT liability is expected to increase by around £34,000 when pension assets are included. These are static estimates - actual numbers may be lower if households accelerate pension drawdown in response.
- Spouse exemption still applies - leaving pension to a surviving spouse remains IHT-exempt under Section 18 IHTA 1984.
Planning implications
- Drawdown timing. Drawing pension during retirement now reduces IHT exposure (the pot is no longer there at death). Pre-reform, holding cash in the pension wrapper was tax-advantaged for estate planning - that advantage disappears.
- Lifetime gifts. Gifting pension drawdown income during life can move wealth out of the estate via the 7-year PET rules. Combine with the £3,000/year annual gift exemption and normal-expenditure-out-of-income rules.
- DB vs DC. Defined-benefit dependants' pensions are excluded from IHT scope. Defined-contribution unused pots are in scope. This widens the IHT advantage of staying in legacy DB schemes (e.g. NHS 1995 Section over a transferred DC pot).
- Married couples. Leaving the pension to a surviving spouse defers IHT but the same pot eventually faces IHT at the second death (unless drawn down in between).
- Pension lump-sum recycling. Combining the 25% tax-free lump sum with gifting / ISA / investment outside the pension wrapper can move wealth before death.
Sources
- HMRC - Inheritance Tax on pensions technical note
- HMRC - Reforming Inheritance Tax: unused pension funds and death benefits
- IHT bands per current site canonical: Nil-Rate Band £325,000; Residence Nil-Rate Band £175,000; couple combined max £1,000,000 (NRB £650k + RNRB £350k); IHT rate 40% on excess (36% with charitable bequest >10%).
- Estimate only. Not tax advice. For complex estates engage a STEP-qualified solicitor or accountant.