Pension Death Lump Sums After April 2027: Tax, Nominations, and Planning

For the better part of two decades, undrawn pension funds at death have been one of the most effective tools for passing wealth to the next generation free of Inheritance Tax. This is about to change. From 6 April 2027, most pension death benefits will be brought within the deceased's estate for IHT purposes. This is now law — the change was legislated in the Finance Act 2026, which received Royal Assent on 18 March 2026 — although some operational detail remains to be set out in regulations. Planning should begin now.

This guide explains the current position, the 2027 changes, the income tax rules for beneficiaries receiving pension death lump sums, and the steps that can be taken to adapt.

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The Current Position: Pensions Are Outside the Estate

Under the current rules (pre-April 2027), registered pension scheme funds — whether in a SIPP, a workplace DC scheme, or a drawdown fund — are held in trust by the pension scheme trustees and are not legally part of the member's estate. On death:

• The pension trustees exercise their discretion (informed by the member's expression of wishes) to determine who receives the death benefit
• The death benefit falls outside the member's estate for IHT purposes
• No IHT is payable, regardless of how large the pension fund is

Current income tax position on death benefits:

• Death before age 75 (crystallised or uncrystallised): lump sum paid to nominated beneficiary — free of income tax (subject to the Lump Sum and Death Benefit Allowance of £1,073,100)
• Death after age 75: lump sum paid to nominee — subject to income tax at the recipient's marginal rate

The income tax-free treatment for under-75 deaths (within the LSDBA) has made pension funds particularly attractive as a multi-generational wealth transfer vehicle: a parent could leave a £500,000 SIPP to a child, who receives it entirely free of both IHT and income tax.

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The 2027 Change: Pensions Within the Estate

The Autumn Budget 2024 announced, and the Finance Act 2026 legislated, that from 6 April 2027 most unused pension funds and lump sum death benefits will become part of the deceased's estate for IHT. The mechanics:

• The deceased's personal representatives are responsible for calculating and reporting the IHT attributable to the pension assets — not the pension scheme administrator
• Beneficiaries and personal representatives co-ordinate so that the IHT due on the pension element is settled; the scheme can pay relevant IHT directly to HMRC out of the death benefit where requested, but the legal liability rests with the personal representatives
• The IHT charge is applied using the estate's marginal IHT rate — which could be 0% (if the total estate including pension is within the nil rate band and available reliefs) or 40% (if above)

Interaction with income tax: for post-75 deaths, death benefits remain subject to income tax at the beneficiary's marginal rate in addition to any IHT. To mitigate double taxation, the draft regulations provide that income tax is not charged on the portion of relevant death benefits equal to the IHT paid on the same pension assets (and, where income tax has been deducted, the beneficiary may reclaim the amount referable to the IHT). This relief reduces but does not eliminate the combined burden, so the overall effect of IHT plus beneficiary income tax should still be modelled carefully.

Who is exempt?

The spousal and civil partner exemption should continue to apply — pension assets passing from one spouse to another should remain IHT-free as part of the inter-spouse exemption. The IHT problem primarily arises on the second death, when assets pass from the surviving spouse to children or other beneficiaries.

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The Lump Sum and Death Benefit Allowance

Even under the current rules (and likely under the post-2027 rules), an income tax framework governs death lump sums paid from registered pension schemes. This operates through the Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100.

How the LSDBA works:

The LSDBA is a cumulative limit across all pension death benefits (and pension commencement lump sums taken during the member's lifetime). Where a death benefit lump sum is paid:

• If the deceased's pension benefits have not previously exceeded the LSDBA during their lifetime: the full lump sum (where death is before age 75) can be paid to the nominee free of income tax up to the LSDBA
• Any excess above the LSDBA is subject to income tax at the beneficiary's marginal rate
• Where death is after age 75: income tax applies at the recipient's marginal rate regardless

This means that from a pure income tax perspective, the LSDBA limits tax-free lump sum death benefits — but there is no cap on a drawdown fund passing to a beneficiary's flexi-access drawdown after the member's death (the beneficiary then draws income from the inherited drawdown pot, subject to income tax).

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Nominations: Still Critical Under the 2027 Regime

Even if pensions are brought within the IHT estate, nominations (expressions of wishes) remain extremely important for two reasons:

1. Directing the remaining fund: after IHT is paid by the scheme, the trustees still need to know who should receive the residual fund. Without an up-to-date nomination, the trustees must exercise their full discretion — and may not make the choices the member would have preferred.

2. IHT allocation: where the estate is complex and includes pension assets alongside other assets, the IHT calculation will need to take into account the full estate. If multiple beneficiaries receive different assets (e.g. the house goes to one child, the pension to another), the IHT liability attributable to the pension portion matters for who bears the cost.

Nomination best practice (still valid post-2027):

• Review and update nomination forms at every life event: marriage, divorce, birth of children or grandchildren, death of a named nominee
• Name specific individuals, not just "my estate" (directing pension to the estate makes it unambiguously subject to IHT and removes trustee discretion)
• For larger pensions with multiple potential nominees, consider a discretionary trust nomination — naming a trust as the nominated beneficiary gives trustees professional discretion in distributing and managing the death benefit fund

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What Beneficiaries Need to Know

Whether the death is before or after 2027, and whether IHT applies, beneficiaries receiving a pension death benefit have options:

Lump sum: take the full death benefit as a cash lump sum. Subject to income tax if the member died after 75 (or if the LSDBA is exceeded for pre-75 deaths). Simple but inflexible.

Inherited drawdown: the beneficiary designates the inherited fund into their own flexi-access drawdown. They then draw income from the inherited pot as they choose. Income drawn is subject to income tax at the beneficiary's marginal rate. The inherited drawdown pot can remain invested, potentially for many years. This is usually the most tax-efficient route for beneficiaries who do not need the cash immediately.

Annuity purchase: the death benefit can be used to purchase an annuity for the beneficiary. Annuity payments are subject to income tax. This is rarely the most flexible choice.

Disclaim: a beneficiary can disclaim their entitlement, and the trustees will consider the next person in the nomination. This can be useful for IHT planning — a beneficiary in the 40% IHT band may prefer to disclaim in favour of a lower-tax beneficiary. Professional advice is needed before disclaiming.

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Planning Steps Before April 2027

Given the 2027 change, now is the time to review:

1. Quantify the IHT exposure

Estimate the total estate value including pension funds. Calculate the IHT liability assuming the estate passes to non-exempt beneficiaries (i.e. not a spouse). The nil rate band (£325,000), any residence nil rate band (up to £175,000), and any Business Property Relief or Agricultural Property Relief should be considered.

2. Consider Accelerating Pension Drawdown

Drawing down the pension fund during lifetime and deploying those assets elsewhere may be preferable to leaving a large pension sitting within the IHT estate. This approach:

• Reduces the pension estate subject to IHT
• The drawn funds, if invested in ISAs, are within the estate but free of income and CGT
• The drawn funds, if invested in BPR-qualifying assets after two years, may attract Business Property Relief — but note the relief was substantially curtailed from 6 April 2026: 100% relief now applies only up to a £2.5 million allowance per individual (transferable between spouses), with relief above that allowance restricted to 50%, and AIM/unlisted shares qualifying for 50% relief only and outside the £2.5 million allowance. BPR is therefore no longer a route to full IHT exemption on unlimited sums

The cost: income tax is paid on pension withdrawals at marginal rate. The saving: potentially 40% IHT on the net amount drawn. Whether this is worthwhile depends on the relative rates.

3. Maximise Spousal Transfer

Ensure expressions of wishes direct pension funds to the surviving spouse first. The IHT position on first death (to spouse) remains favourable even post-2027. The IHT planning challenge is on the second death — which can be addressed through lifetime gifts, trust structures, and drawdown during the surviving spouse's lifetime.

4. Consider Charitable Nominations

Leaving pension funds (in whole or in part) to charity achieves:

• No IHT (charitable exemption)
• No income tax (charity is exempt)
• A potential reduction in the effective IHT rate on the rest of the estate (if charitable bequest is 10%+ of net estate, IHT rate on rest falls from 40% to 36%)

5. Review the Nomination Structure

Ensure nominations are up to date. Consider a discretionary trust nomination if the fund is large, to give beneficiaries flexibility in how they receive the funds post-death.

6. Track the Outstanding Detail

The headline 2027 rules are now legislated (Finance Act 2026), but some operational detail — including reporting and payment mechanics — is still being set out in HMRC regulations and guidance. Before making significant structural changes (e.g. accelerating large pension withdrawals), confirm the up-to-date reporting position and model the outcome against your specific circumstances.

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Compliance Caveats

The 2027 pension IHT changes are legislated in the Finance Act 2026 (Royal Assent 18 March 2026), effective for deaths on or after 6 April 2027. Some operational detail — including reporting and payment mechanics and the specific treatment of different pension types — is still being set out in regulations and HMRC guidance as of June 2026. This guide does not constitute regulated financial, tax, or legal advice. Given the complexity and potential scale of the tax involved, any planning in response to the 2027 changes should be undertaken with the assistance of a regulated financial adviser, a chartered tax adviser, and where appropriate, an estate planning solicitor.

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How Global Investments Can Help

The pension IHT change is the most significant shift in pension death benefit planning in a generation. Global Investments is working with clients now to assess their exposure, model the impact of different planning strategies, and implement appropriate changes ahead of the April 2027 effective date. We can connect you with specialist advisers covering estate planning, tax, and pension law, and help you see the full picture across your pension, property, and investment assets. Contact our team to arrange an urgent review.