Employers urged to prepare staff for upcoming changes to Inheritance Tax on pensions that could trigger an 87% tax charge

Summary

From 6 April 2027, unused defined contribution (DC) pensions will be included in an individual’s estate for Inheritance Tax (IHT) purposes. That means pension pots left unspent when someone dies could be taxed at 40% as part of the estate, and beneficiaries may also face income tax on withdrawals — together creating scenarios where effective tax on a pension pot can reach as much as 87% in worst-case examples. Employers are being urged to prepare now: staff will likely seek guidance on pensions, nominations and estate planning, and employers should ensure appropriate support, education and links to regulated financial advice are available.

Key Points

From 6 April 2027, unused DC pension funds will be treated as part of the estate for IHT.
Personal representatives (estate executors) will be responsible for declaring and paying any IHT due, with pension providers obliged to supply supporting information.
Where nil-rate bands are already used, a pension pot can attract 40% IHT, and beneficiaries over 75 may also face income tax on withdrawals — compounding the tax hit.
If a pension pot pushes an estate above the £2 million RNRB taper threshold, the Residence Nil Rate Band can be lost and trigger an additional IHT charge; in a worked example this produces an effective tax rate of 87% on a £350,000 pot.
The Government estimates around 10,500 additional estates a year could be impacted by the change.
Employers should act now: monitor legislation, encourage staff to review nominations and estate plans, and work with pension providers and advisers to offer guidance and access to regulated advice.

Content Summary

The measure brings unused DC pensions into the estate for IHT calculations. Previously pensions were largely outside the estate for IHT, but the change means pensions may be taxed at the standard 40% IHT rate if nil-rate bands are already used. Additionally, when beneficiaries are over 75, withdrawals from inherited pensions can be taxed as income at the beneficiary’s marginal rate, increasing the overall bite.

The article includes a detailed example where a £350,000 pension pot, when added to an estate that already reaches the £2 million threshold, causes the Residence Nil Rate Band (RNRB) to be tapered away. The resulting combination of IHT and income tax — plus the tax effect of losing the RNRB — leads to a total tax bill of £304,500 on the pension pot, an effective rate of 87%.

Exemptions remain for certain benefits such as lump sum death-in-service payments, joint annuities, dependants’ pensions and charity lump sums. Pension providers still need to provide information to assist with IHT reporting, but the responsibility for paying IHT falls to personal representatives.

Context and Relevance

This is a material policy shift for retirement and estate planning in the UK. Employers will see increased demand from employees for financial education, clearer nomination processes and access to regulated advice as individuals reassess how to use pension savings versus preserving other assets for inheritance. The change sits alongside demographic trends — longer retirements, rising living and care costs — meaning some people will have little pension left at death, but those with larger pots could be hit hard. For HR, reward and pensions teams, this alters the conversations you need to have with staff now and over the next two years.

Author style

Punchy: this is a big, practical change that flips conventional estate planning logic — employers and pensions teams should not treat it as a technical footnote. If you manage staff benefits or pensions communications, now’s the time to mobilise guidance, update messaging and make regulated advice available.

Why should I read this?

Right, quick and dirty — if you employ people, this affects them and it’ll affect you. Pensions that were previously out-of-bounds for IHT could suddenly be punching through estates and creating massive tax bills for families. Employees will want answers; employers who prepare now save time, risk and frustration later. In short: get ahead of the questions and make sure your workplace support isn’t caught on the back foot.