Life insurance to cover inheritance tax on your pension from April 2027
From 6 April 2027 most unused defined-contribution pension pots and death benefits will count towards your estate for UK Inheritance Tax. Here is what is changing, who is affected, and why a whole-of-life policy written in trust is the mitigation the industry is now talking about.
What is changing — and what to do
- The change: from 6 April 2027 most unused defined-contribution (DC) pension funds and death benefits fall within your estate for Inheritance Tax (IHT), rather than passing outside it as they generally do today.
- The cost: IHT is charged at 40% on the value of an estate above the available nil-rate band (currently £325,000). Pension wealth added on top can tip an estate over that line.
- Who is hit: HMRC estimates around 10,500 estates will newly face an IHT bill in 2027/28 because of this change.
- The mitigation: a whole-of-life policy written in trust can provide a tax-free lump sum, outside the estate, that your family can use to pay the IHT bill quickly — without selling assets or waiting for probate.
How pension IHT treatment changes on 6 April 2027
| Now (to 5 April 2027) | From 6 April 2027 | |
|---|---|---|
| Unused DC pension pot on death | Generally outside the estate for IHT | Generally within the estate for IHT |
| Most lump-sum death benefits | Typically paid free of IHT | Counted towards the estate for IHT |
| Rate above the nil-rate band | 40% | 40% |
| Who reports and pays | Scheme handles death benefits | Personal representatives report and settle IHT due |
| Death-in-service / certain DB pensions | Outside IHT | Remain excluded from these changes |
Summary of the announced reform for orientation only, based on HMRC guidance. Your position depends on your scheme and circumstances — this is information, not tax advice, and not a quote.
What the 2027 pension Inheritance Tax change actually is
Today, an unused personal pension can usually be passed to your beneficiaries on death without forming part of your estate for IHT — one reason pensions have become a popular way to pass on wealth. That favourable position is ending. From 6 April 2027, most unused DC pension funds and death benefits will be brought into the value of your estate when IHT is calculated, broadly regardless of whether the scheme has discretion over who receives the money.
IHT is charged at 40% on the value of an estate above the available nil-rate band, which currently stands at £325,000 per person (a separate residence nil-rate band of up to £175,000 can apply where a home passes to direct descendants). Adding a pension pot on top of property and savings can push an estate that was previously below the threshold above it — creating a bill that did not exist before. Certain benefits, such as death-in-service payments from a registered scheme and some defined-benefit dependant’s pensions, are excluded from the changes.
An illustrative IHT liability — and the cover to meet it
| Illustrative figure | Amount |
|---|---|
| Estate (home + savings) | £500,000 |
| Unused DC pension pot (in estate from 2027) | £300,000 |
| Total taxable estate | £800,000 |
| Less nil-rate band | −£325,000 |
| Amount taxed at 40% | £475,000 |
| Indicative IHT due | £190,000 |
| Purpose of a whole-of-life sum assured in trust | To provide a tax-free lump sum towards that £190,000 |
Illustrative only, to show the mechanism — it ignores the residence nil-rate band, transferable allowances, reliefs and individual circumstances. Real figures and any premium depend on your estate and underwriting. Not advice and not a quote.
How whole-of-life cover in trust meets the bill
A whole-of-life policy lasts for life and is guaranteed to pay out whenever you die, as long as premiums are maintained — which makes it suited to an IHT liability that, by definition, only crystallises on death. The idea is to size the cover towards the expected bill so your family has the cash to settle it.
Why “in trust” matters is the crucial part. A policy written in trust is generally outside your estate, so the payout itself is not swept into the IHT calculation — it does not make the problem bigger. Just as importantly, the trustees can usually receive the money without waiting for probate, often within weeks. That speed matters because IHT is typically due within six months of death, and an estate can be hard to access until probate is granted. Cover in trust provides ring-fenced liquidity at exactly the moment it is needed, so the family is not forced to sell the home or other assets in a hurry. Putting a policy in trust is usually free and arranged when you take out the cover. To understand the underlying product, see our life insurance hub and the wider guides.
Why the April 2027 date creates urgency
The new rules take effect from 6 April 2027, but the planning window is now. Cover is generally cheaper and easier to obtain the younger and healthier you are, and underwriting takes time. Leaving arrangements until the rules bite — or until health changes — can mean higher premiums or limited options. Reviewing your estate and any pension wealth well ahead of the deadline gives you the most room to act calmly rather than under pressure.
What to check before you act
Start by estimating your taxable estate, including the pension pots that will be in scope from 2027, and compare it with the nil-rate bands available to you. Check whether any death-in-service or defined-benefit cover is excluded. Consider whether existing policies are written in trust, and whether the trust still names the right beneficiaries. Because this is estate planning, the structure has to be right for your circumstances — speak to a qualified financial adviser and, where appropriate, a solicitor before making changes. For background reading, browse the life insurance hub and our guides.
Pension IHT and life insurance: FAQs
Information only — not financial or tax advice. Figures are indicative or illustrative and tax treatment depends on your individual circumstances and may change. For estate planning, consult a qualified financial adviser and, where appropriate, a solicitor. My Insurance Expert is not an FCA-authorised intermediary and does not arrange or sell policies. Last updated: 2026-06-13