When pension rules change in April 2027, many UK families could find that inheriting a pension is more complicated, and more expensive, than they expected. The combination of new Inheritance Tax rules and existing income tax treatment on inherited pensions has raised concerns about a 'double tax hit'.

Understanding the rules now can help families plan and avoid surprises later.

What are the current rules?

Defined contribution pensions, including SIPPs, can typically be inherited tax-efficiently. If the saver dies before age 75, beneficiaries usually receive the funds free of income tax. After age 75, the funds are taxable as income when withdrawn.

Pensions are currently outside the estate for inheritance tax in most cases.

What is changing from April 2027?

The government plans to bring unused pension funds into the estate for inheritance tax purposes. This means pension Wealth could be added to other Assets when working out whether IHT is due, with the standard 40% rate applying above the available nil-rate bands.

Spouse and civil partner transfers are expected to remain exempt.

How could a double tax hit occur?

If the saver dies after age 75, the inherited pension could face both IHT on the estate value and income tax on withdrawals. According to reports, this could push the effective tax rate above 50% in some cases.

The government has acknowledged this concern, and final rules may include limits to avoid extreme outcomes, but as of now, families should plan cautiously.

Will death before 75 still be tax-free?

Income tax may still not apply to beneficiary withdrawals if the saver dies before 75, but the underlying pot could be subject to IHT.

What about defined benefit pensions?

Most DB pensions pay a spouse's or dependant's pension on death, which is taxed differently. The 2027 reforms are aimed at DC pensions, but the details of DB treatment should be checked when final legislation is published.

How can families prepare?

Reviewing wills, expression of wishes forms and overall estate structure is the first step. Couples may consider how to use both partners' nil-rate bands and the spouse exemption to delay tax.

Drawing income from pensions during retirement, rather than leaving them untouched, can reduce the pot left in the IHT net.

Should beneficiaries take pension money quickly?

Not necessarily. Taking large sums in one go can push beneficiaries into higher tax bands. Spreading withdrawals over several years often reduces overall tax.

Beneficiaries can typically keep inherited pensions in a beneficiary drawdown wrapper, taking income flexibly.

What about young beneficiaries?

Children or grandchildren who inherit pension wealth can also use beneficiary drawdown, with the funds growing tax-free until withdrawn. This can be a powerful long-term planning tool, even after the 2027 changes.

Will trusts help?

Trusts can sometimes mitigate tax exposure, but they come with their own rules. Pension trustees often have wide discretion, and using nominations carefully may be more effective than complex trust structures.

Why this matters now

With less than two years until the changes take effect, UK families should be thinking about their long-term plans now. Specialist advice can help model different scenarios and find the best balance between income tax, IHT and family needs.

Key Takeaways

  • From 2027, inherited pensions may face both IHT and income tax.
  • Spouse and civil partner transfers should remain exempt.
  • Drawing pension income during retirement can reduce the IHT bill.
  • Beneficiary drawdown can spread tax over many years.
  • Reviewing nominations and seeking advice is increasingly important.

Frequently Asked Questions

How much could the double tax hit be?

It depends on the estate size and the beneficiary's income, but could push effective rates above 50%.

Do all pensions face the new rules?

The proposals focus on DC pensions; DB schemes may be treated differently.

Will beneficiaries always pay income tax?

Income tax usually applies if the saver died after 75; before that, withdrawals may still be tax-free.

Can I gift pension money before death?

Pensions cannot be gifted directly. You would first need to draw money out, triggering income tax.

Spreading the tax over time

Beneficiaries who inherit a pension often have flexibility about when to draw the funds. Spreading withdrawals across multiple tax years can keep them in lower bands and reduce overall tax.

Using beneficiary drawdown rather than taking everything immediately also keeps the funds invested, potentially providing growth and additional flexibility.

Common misconceptions to avoid

  • 'Inherited pensions are always tax-free.' Tax can apply, depending on age at death and the new rules from 2027.
  • 'Beneficiaries must withdraw the whole pot.' Beneficiary drawdown allows phased withdrawals.
  • 'Trusts always solve pension IHT issues.' Trusts have their own rules and complications.

A final word

Taking a measured, well-informed approach is one of the most important parts of any UK retirement plan. Regularly reviewing pensions, ISAs and other savings, alongside major life changes, helps ensure that your long-term goals stay on track. Working with a regulated financial adviser, and consulting trusted resources such as MoneyHelper and Pension Wise, can make complex decisions easier to navigate.