Do Pensions Count Towards Inheritance Tax

How Inheritance Tax works

Inheritance Tax is charged at 40% on the value of your estate above the available allowances. For 2025 26, the standard Nil Rate Band is £325,000, and you can also benefit from the Residence Nil Rate Band of up to £175,000 if you leave your main home to direct descendants.

Your estate includes property, savings, investments, and personal belongings. However, pensions are generally treated differently — they do not usually count towards your estate for IHT purposes.

When pensions are exempt from Inheritance Tax

Most defined contribution pensions (also known as money purchase or personal pensions) are not included in your estate when you die. This means they are usually exempt from IHT.

The reason is that you never fully own the pension funds; they are held in trust by the pension provider until distributed to your beneficiaries. Because the money is not technically part of your personal estate, it is outside the IHT calculation.

This rule applies to:

Personal pensions

Self-Invested Personal Pensions (SIPPs)

Workplace defined contribution schemes

Most stakeholder pensions

As long as the scheme administrator has discretion over how the funds are paid, the money remains outside your estate.

What happens when you die before or after age 75

The age at which you die affects how your beneficiaries are taxed when they inherit your pension.

If you die before age 75: Your beneficiaries can usually withdraw your pension tax-free, provided the funds are paid out within two years of your death.

If you die at age 75 or older: The pension remains free from Inheritance Tax, but your beneficiaries will pay Income Tax at their own marginal rate when they withdraw the funds.

The difference lies not in IHT treatment, but in the tax applied when the money is eventually accessed.

Example

If you die at 72 with a £300,000 pension pot, your children can inherit and withdraw it tax-free if the funds are distributed within two years.

If you die at 78, they will still receive the £300,000 pension free from IHT, but they will pay Income Tax when taking withdrawals, depending on their personal tax bands.

When pensions might count towards Inheritance Tax

There are a few situations where a pension could be included in your estate or trigger IHT liability:

If you withdraw pension funds and hold them as cash or investments.
Once pension money is taken out, it becomes part of your estate and is subject to IHT if not spent or gifted.

If you make transfers or changes shortly before death.
Moving pension funds between schemes or changing beneficiaries while in poor health can sometimes bring the funds into your estate if HMRC believes the purpose was to avoid tax.

If the scheme lacks discretionary control.
Some older or small company schemes automatically pay benefits to a nominated person. In these rare cases, the value may be included in your estate because you effectively controlled who received it.

Defined benefit (final salary) pensions.
These usually pay a guaranteed income to your spouse or dependants rather than a lump sum, so the ongoing payments are subject to income tax, not IHT.

In general, as long as the pension remains within the scheme and is managed by the provider, it will not be included in your estate.

The importance of nomination forms

Even though pensions are outside your estate, you should always complete a nomination of beneficiary (also called an expression of wish) form.

This form tells the pension provider who you would like to receive the funds if you die. The provider then uses its discretion to decide how to distribute the money, ensuring it stays outside your IHT estate.

If you fail to complete a nomination form, the provider may decide where the funds go, which could delay payment and complicate tax treatment.

You can update your nomination at any time, which is especially important after major life events such as marriage, divorce, or the birth of children.

Pensions and gifts

You cannot use pension funds to make gifts during your lifetime. Any withdrawals you make and then give away will count as potentially exempt transfers for IHT purposes.

If you survive seven years after making the gift, it will fall outside your estate. If you die within that period, it may be subject to IHT depending on your total estate value and the time elapsed.

Therefore, if your goal is to reduce IHT, it is usually better to leave pension funds untouched and use non-pension savings for lifetime gifts.

Inheritance Tax planning with pensions

Pensions can be a highly effective inheritance planning tool. Because they are generally exempt from IHT and can be passed on flexibly, many people now use pensions as a way to preserve wealth for future generations.

Some common strategies include:

Spending non-pension assets first: Since ISAs and property form part of your estate, using them for income before drawing from your pension can reduce your eventual IHT bill.

Delaying pension withdrawals: Leaving funds in the pension for as long as possible helps keep them outside your estate.

Leaving pensions to younger generations: Beneficiaries can retain the funds within their own pension wrappers, keeping them tax-deferred.

It is also possible to designate pensions to trusts in some cases, though this requires professional advice to ensure compliance with both IHT and pension regulations.

Keeping track of multiple pensions

If you have several pensions, each provider will handle death benefits separately. You can nominate different beneficiaries for each and specify whether they should receive a lump sum or drawdown access.

Regularly reviewing all your nominations ensures that your pensions align with your current wishes and family circumstances.

When to seek professional advice

While most pensions are excluded from Inheritance Tax, combining them with other assets and estate planning decisions can create complexity. For example, drawing lump sums or transferring pensions near the end of life can have unintended tax effects.

Speaking with a financial adviser or tax specialist ensures that your pension arrangements fit with your wider estate plan and that your beneficiaries receive their inheritance in the most tax-efficient way.

Final thoughts

In most cases, pensions do not count towards Inheritance Tax, making them one of the most efficient ways to pass on wealth. As long as the funds remain within the pension scheme and you have completed a nomination form, the money will usually be exempt from IHT.

However, once you withdraw pension funds or make significant changes close to death, the rules can become more complicated. By keeping your pension arrangements up to date and seeking expert advice, you can ensure your loved ones benefit from your savings without facing unnecessary tax liabilities.