Pensions from April 2027
Pension death benefits excluded from inheritance tax
Not every payment a scheme makes on death joins the estate. The Act names four kinds of benefit that stay out, and HMRC has drawn the edges of each one.
From 6 April 2027, section 150A of the Inheritance Tax Act 1984 brings unused pension funds and lump sum death benefits into the estate, but subsection (6) lists "excluded benefits" that never count. There are four: a dependants' scheme pension; a trivial commutation lump sum that replaces such a pension; a dependant's or nominee's annuity bought together with the member's own lifetime annuity; and any benefit paid only because the member was in a particular employment or work immediately before death, which covers death in service lump sums from the current job. HMRC's technical note keeps two things inside the estate: death in service cover from an old job where the member was deferred, and a refund of contributions that would have been paid anyway. A parent of 58 who dies in service with three times a £60,000 salary as cover, a £25,000 refund and a £120,000 pot from an old employer owes £38,000 of inheritance tax at 40 % above the bands; if the cover counted, it would be £110,000.
What counts in the estate and what does not
Counted in the estate
£145,000
| Death in service (excluded) | £180,000 |
| Dependants’ scheme pension (excluded) | £9,000 a year |
| Inheritance tax if above the bands | £58,000 |
Excluded benefits are left out under IHTA 1984 s.150A(6).
Law read and sums checked by Radif Partners · Editorial policy · How the tax is worked out
Excluded is not the same as exempt
Two words do different jobs in the new rules. An excluded benefit is removed before anything is added up: it is not notional pension property, it adds nothing to the estate's value, and it plays no part in any threshold. An exempt benefit is counted first and relieved afterwards. Section 69 of the Finance Act 2026 extends the spouse, civil partner and charity exemptions to pension benefits, so a pot nominated to a widow or to a charity carries no inheritance tax, but its value is still in the estate.
The difference shows up at the edges. The residence nil-rate band is tapered on the estate before exemptions, so a pension left to a spouse still counts towards the £2,000,000 test, while a death in service lump sum does not. The withholding rules in section 68 also leave both excluded and exempt benefits alone: a scheme told to hold back half of a beneficiary's entitlement does not hold back either.
The four excluded benefits, one by one
The list in section 150A(6) is short and closed. Anything not on it that a scheme can pay on death is in the estate.
Dependants' scheme pensions. This is the classic widow's, widower's or child's pension of a defined benefit scheme: a regular income the scheme pays to a dependant after the member's death. HMRC's impact note confirms that dependants' scheme pensions from defined benefit and collective money purchase arrangements are outside the change. They have always been taxed as the dependant's income and still are.
Trivial commutation of a dependants' pension. When a dependant's pension is small, a scheme can pay it as a one-off lump sum instead. If that lump sum extinguishes the dependants' scheme pension, it is excluded in the same way as the pension it replaces. The exclusion follows the pension; a lump sum that is not replacing one does not qualify.
A joint life annuity bought together. When the member bought a lifetime annuity with a dependant's or nominee's annuity attached, the survivor's annuity is excluded. The condition is that both were purchased together. A pot held in drawdown and later used by the beneficiary to buy an annuity is a different thing: its value at death is notional pension property.
Death in service. The last category is defined by a test of employment: a benefit payable only because the member was in employment or other work of a particular description immediately before death. Life cover of a multiple of salary under a workplace scheme is the obvious example. The words "only" and "immediately before death" do most of the work, and they are what limit the exclusion.
Death in service: where the line falls
HMRC’s technical note draws the line with an example: a scheme that pays three times salary and a refund of the member's contributions to the scheme. The three times salary is excluded because nothing would be paid without the employment. The refund is not excluded, since it would be paid on death in any case, employed or not, and it therefore counts as part of the estate.
The same reasoning covers old jobs. A member who has left an employer and remains a deferred member of its scheme is no longer "in employment immediately before death" with that employer, so a lump sum death benefit that scheme pays is in the estate. People with several jobs over a career often have deferred benefits in more than one scheme; only the cover from the job they hold at death is outside.
A worked case: dying in service at 58
Take a divorced parent of two who dies at 58 on or after 6 April 2027 while still employed on a salary of £60,000. The employer's scheme pays three times salary as death in service cover and returns £25,000 of the member's own contributions. There is also a £120,000 pot left with a previous employer, a £350,000 home that goes to the children and £100,000 of savings.
| Item | Value | Treatment |
|---|---|---|
| Death in service lump sum, current job | £180,000 | Excluded |
| Refund of contributions from the same scheme | £25,000 | In the estate |
| Pot left with a previous employer | £120,000 | In the estate |
| Home left to the two children | £350,000 | In the estate |
| Savings | £100,000 | In the estate |
| Inheritance tax from 6/4/2027, as the law stands | £38,000 | |
| Inheritance tax if the cover were counted | £110,000 |
With the cover excluded, the estate counted for inheritance tax is £595,000 against a threshold of £500,000, and the bill is £38,000. Had the cover counted, the estate would have been £775,000 and the tax £110,000. Under the rules for deaths before the change the pension items were all outside and the estate owed £0. Because the member was under 75, the children pay no income tax on these lump sums as long as they are paid within 2 years and within the remaining lump sum and death benefit allowance.
What stays in the estate
It is easier to list what is excluded than what is not, because the default is inclusion. Unused money purchase pots, including personal pensions, SIPPs and workplace pots, are in the estate, whether untouched or already in drawdown. So are lump sums from defined benefit schemes that are not tied to current employment: a guarantee paid as a lump sum when a pension in payment stops early, or a refund of contributions. Death in service cover from a scheme where the member was deferred is in. The page on defined benefit schemes looks at the lump sums those schemes pay.
A benefit that is in the estate is not necessarily taxed. Paid to a spouse or civil partner, it is exempt; paid to a charity, it is exempt and helps towards the 36 % rate. The page on pensions left to a spouse follows that route, which defers the question to the survivor's death rather than removing it.
Checking which category a payment falls into
The scheme administrator is the first source of information on what a scheme will pay on death and under which rule. HMRC's technical note says the government will lay regulations later in 2026 on the information schemes give personal representatives. What matters for the exclusion is the reason a payment is made: cover that exists because of the job, or money that would be paid out on death whatever the member was doing.
This page describes the categories in the law and HMRC's reading of them. It does not say whether a particular payment is excluded in a particular case, which depends on the scheme rules and the facts at death. The personal representatives, the scheme, a solicitor or a regulated adviser can confirm the treatment of a real benefit. The calculator can be run without the excluded amounts to see what is left in the estate.