Pensions from April 2027
Pension or ISA: what an heir keeps of each from 2027
The reform removes the pension’s exemption from inheritance tax, which used to settle the comparison. What is left is a difference in income tax.
For deaths on or after 6 April 2027, money left in a pension joins the estate for inheritance tax, as money in an ISA or a bank account always has. Above the tax-free bands, both are charged at 40 %. The difference between them is now income tax. Cash or investments inherited from an ISA reach the heir as capital, while a pension inherited from someone who died at 75 or over is taxed as the heir's income when drawn, after a deduction for the inheritance tax already borne. In the site's comparison of £100,000 left by a single person whose estate is already above the bands, an heir earning £60,000 keeps £60,000 from the ISA and £19,979 from the pension when the death is at 80 and the pension is drawn in one year. Before the reform, the same pension would have left £53,229. When the death is before 75, the pension leaves £60,000, level with the ISA. These are illustrations of how the rules work, not a view on which money anyone should spend first.
£ left in a pension or in an ISA, death at 75 or over
Heir keeps from the pension
£34,054
| Heir keeps from the ISA | £60,000 |
| Income tax on the pension | £25,946 |
| Inheritance tax on either | £40,000 |
Pension drawn in one tax year. Spreading it lowers the income tax.
Law read and sums checked by Radif Partners · Editorial policy · How the tax is worked out
From 2027 both sit in the estate
The old comparison was lopsided. An ISA has always been part of its owner's estate, so £100,000 in a stocks and shares ISA above the tax-free bands lost £40,000 to inheritance tax at death. The same £100,000 in a pension usually lost nothing, because a discretionary scheme's death benefits were outside the estate. Section 66 of the Finance Act 2026 ends that for deaths on or after 6 April 2027: the unused pension is now notional pension property, added to the estate like any other asset, measured for the residence band taper, and charged at the same rate.
That leaves the two on equal terms for inheritance tax. Neither has a separate allowance, neither escapes the frozen bands described on GOV.UK, and both benefit from the same exemptions when left to a spouse, a civil partner or a charity. What still separates them is what happens to the heir after the estate is settled.
The heir's side: capital against taxable income
Money inherited out of an ISA arrives as capital. Nothing in the inheritance rules turns it into income for the person who receives it. A pension is different when the member died at 75 or over: GOV.UK confirms that lump sums, drawdown and annuity payments from the inherited fund are taxed as the beneficiary's income. Section 70 lets the beneficiary deduct the inheritance tax borne on the benefit, so income tax falls only on what is left, but it still falls.
The table measures that gap. It adds £100,000 to an estate that is already above its bands, once as savings or an ISA and once as an unused pension, and asks the engine how much more the single heir receives in each case. The last column shows what the pension would have left under the rules for deaths before 6 April 2027.
| Situation | Heir gains from the ISA | Heir gains from the pension | Pension, old rules |
|---|---|---|---|
| Death at 70, heir earning £60,000 | £60,000 | £60,000 | £100,000 |
| Death at 80, heir earning £30,000 | £60,000 | £27,054 | £58,783 |
| Death at 80, heir earning £60,000 | £60,000 | £19,979 | £53,229 |
| Death at 80, heir earning £110,000 | £60,000 | £19,479 | £52,729 |
| Death at 80, heir earning £150,000 | £60,000 | £21,750 | £55,000 |
| Death at 80, estate within its bands, heir earning £60,000 | £100,000 | £53,229 | £53,229 |
Several patterns stand out. At 70, the pension and the ISA leave the same amount, because the heir pays no income tax on a death before 75. At 80, the gap depends on the heir. A basic rate heir keeps £27,054 from the pension against £60,000 from the ISA; an heir earning £110,000, in the band where the Personal Allowance is withdrawn, keeps only £19,479. Where the estate is within its bands, there is no inheritance tax on either and the pension leaves £53,229, its only cost being income tax.
Why the pension can lose more than the headline rate
A combined rate such as 64 % for a higher rate heir assumes that the whole pension pays inheritance tax at 40 % and that the same amount comes off the heir's taxable income. In a mixed estate the two figures differ. Adding the £100,000 pension raises the estate's bill by £40,000, but the tax is shared across the home, the savings and the pension in proportion to value, so only £15,000 is attributed to the pension, an average of 15.0 %. The deduction under section 567B is that attributed amount, which leaves £85,000 taxable as income. When one heir inherits both the pension and the rest of the estate, they bear the full increase in inheritance tax and receive the smaller deduction, so the pension costs them more than the formula suggests. Where the pension and the rest of the estate go to different people, the split of the tax between them follows the same proportions.
Before 75 the comparison flips
For a death before 75, the heir's position is identical whether the money was in a pension or an ISA, so long as the pension stays within the member's lump sum and death benefit allowance and lump sums are paid within 2 years. Both pay inheritance tax at the same rate, neither pays income tax. The difference is on the member's side. Taking money out of a pension during life is itself taxed: apart from the tax-free share, normally up to 25 % of a pot, a withdrawal is income for the year, as the GOV.UK page on pension tax sets out. So for someone under 75, money left in the pension reaches the heir on the same terms as an ISA without first paying the member's income tax on the way out.
The page on deaths before 75 covers the allowance and the two-year window in detail.
Moving the money during life
After 75, the question changes shape. Drawing from the pension to hold the money in an ISA or other savings replaces the heir's income tax with the member's own, at the member's rates, in the years the money is taken. The table follows a member aged 77 with £20,000 of other income who has already taken tax-free cash, so the whole £100,000 is taxable, compared with leaving it for an heir earning £60,000 after a death at 80. The ISA figures assume the money stays invested at the same value; growth, charges and the ISA subscription limits are not modelled.
| Route | Income tax paid by the member | Heir gains in the end |
|---|---|---|
| Left in the pension, heir draws it in one year | £0 | £19,979 |
| Drawn by the member in one tax year, kept in an ISA or savings | £37,946 | £37,232 |
| Drawn by the member over five tax years, kept in an ISA or savings | £20,000 | £48,000 |
Whether one route leaves more than another turns on two rates: the member's marginal rate on the withdrawals and the heir's marginal rate on the inherited fund. A member with a modest income who spreads withdrawals may pay less than a higher rate heir would. A member who takes a large sum in one year can pay more. Inheritance tax is the same in every row, since the money is in the estate whichever form it takes. The page on cashing in a pension shows the cost of a withdrawal at each income.
What the comparison leaves out
Several things matter in a real decision and are not in these figures. The heir's income can change over the years they draw the fund, which the page on pensions after 75 explores. A pension can be left to several beneficiaries, each with their own rates. The member may need the money for care or living costs, and how long anyone lives is unknown. Gifts made from pension withdrawals raise a separate question: HMRC says the reform does not change the existing position, and whether such gifts are normal expenditure out of income depends on the facts of each case.
This page sets out how two kinds of saving are taxed when they pass on. It does not recommend which to spend first, whether to draw a pension early, or how to arrange an estate. Those are personal decisions with consequences beyond tax, and a regulated financial adviser or a solicitor can look at a real case. The estate calculator runs a whole estate with its heirs.