For most people, the answer right now is no. Pensions work differently from other assets like property or savings, and under today's rules, most pension pots sit outside your estate when you die.
For most people, the answer right now is no. Pensions work differently from other assets like property or savings, and under today's rules, most pension pots sit outside your estate when you die.
At LDB Wealth, we speak to people across Weybridge, Dartford, and the wider Surrey and Kent area who are surprised to learn this and who assume every pension is treated the same way. It isn't, and the exceptions matter.
Not every pension benefit works the same way
There are exceptions to this general rule. Some older pensions and certain payments made directly to a dependant rather than at the trustees' discretion can already count as part of your estate for Inheritance Tax. How you take your pension matters too. A lump sum, an annuity, and a drawdown fund can all be taxed differently, and your age when you die can affect the outcome as well. In short, there is no single answer that applies to everyone.
Inheritance Tax is not the same as Income Tax
It helps to separate the two different taxes here. Inheritance Tax looks at the value of your estate. Income Tax is a separate matter for whoever inherits your pension, and it depends on your age when you die. If you die before 75, your beneficiaries can usually take the money without paying Income Tax on it. If you die at 75 or older, they generally do, and the amount depends on their own income tax band that year; a beneficiary who is a higher-rate taxpayer could pay more than one who isn't. So a pension that avoids Inheritance Tax altogether is not automatically tax-free, since Income Tax can still apply later. Our death benefit options page explains this in more detail.
A confirmed change from April 2027
This settled picture will not last forever. From 6 April 2027, most unused pension funds and death benefits will count as part of your estate for Inheritance Tax, a change confirmed by the government following the Autumn Budget 2024 and set out in HMRC's published policy paper. A few things are expected to stay outside this change, including workplace death-in-service payouts and certain pensions paid to dependants. Money passing to a surviving spouse or civil partner should also keep its current exemption.
Why your nomination form still matters
Even with the spousal exemption expected to stay in place, it is worth checking the form that tells your pension provider who should receive your pension when you die. This form guides the decision, but unlike a will, it is not always legally binding, so an out-of-date form can cause problems no matter what tax rules eventually apply.
More information is expected to be released as we get closer to April 2027. If you want to see how these changes could affect you, get in touch with our team to review your pension and wider estate together.
