A new tax on pensions which is confirmed to take effect after next year could see households in some areas of England slapped with average HMRC Inheritance Tax bills of between £54,000 and £129,000. From 2027, pensions will be included in Inheritance Tax for the first time. Currently, any workplace pensions are outside the remit of Inheritance Tax, and are not taxed at the same rate as the rest of your property and assets when you die.
However, from April 2027, pension pots will no longer be exempt and the value of any unspent and leftover pensions will be added to the value of an estate, along with cash, investments and property, and any money over the threshold will be taxed at 40%. However, because property is more expensive in some parts of the country than others, those in London and the South East are the most likely to be pushed into paying more Inheritance Tax under the new rules.
Currently, you can leave £325,000 to your loved ones after you die without paying any tax. If you include a property, this is increased to £500,000.
The average property price in London right now is £567,000, according the UK House Price Index as of April 2025.
In the South East, it’s £380,000. At the other end of the scale, the average house price is just £156,000 in the North East.
The average pension pot is worth £257,701 as of April, according to PensionsAge.
Adding the average £257k pension to the average London property takes the total estate value to £824,000. That means £324,000 of this is over the Inheritance Tax threshold, producing a bill of £129,600 assuming no other cash or assets.
Before the pension change, this estate would be taxed 40% of £67,000, for a bill of £26,800, meaning the new pension rule has increased the bill by over £100,000.
In the South East, a £380k property plus pension of £257k would yield £137,000 taxable, which at 40% is £54,800.
In the North East, there would be £0 tax to pay because the total value (£156k plus £257k) is still lower than the £500k threshold.
Of course, there is a way to avoid these taxes if you’re in a couple. Married couples do not pay Inheritance Tax on estates they leave to one another, and can add their allowances together.
For example, a husband in London with a £567k house plus £257k pension could leave all of that to their wife when they die. The wife would inherit his allowance, and then add it to her own. Assuming the value remained the same, the £824,000 estate would then be taxed at £0 if she left it to their children when she died, because she is able to use up her £500k allowance and his £500k allowance added together.
Finance firm Royal London explains the new pension taxes. It says: “Currently, defined contribution pensions, where you build up a pot of money to give you an income when you retire, wouldn’t normally be part of your estate and there would be no inheritance tax to pay. The ‘estate’ simply means all the assets, like a house, investments or valuables, that someone owns when they die. But from 6 April 2027 defined contribution pensions will be subject to inheritance tax. The standard rate of inheritance tax is 40%.
“Even with this change, inheritance tax isn’t going to be an issue for most people. That’s because everyone has an entitlement to a nil rate band of £325,000 of assets which they can leave to anyone free of inheritance tax. This is also known as the inheritance tax threshold.
“We know that many people don’t have enough in their pension for the lifestyle they’d like in retirement, so they may not have much, if any, money left in their pension(s) when they die. Often pensions are passed onto the pension saver’s husband or wife and if they don’t have their own pension, or only have a small pension, then they will need that pension to top up any pension savings they have. Government figures estimate that 10,500 estates will pay inheritance tax for the first time, as a result of the changes to the rules on inheritance tax and pensions, and 38,500 will pay more inheritance tax.
“But if you own your own home, then when your defined contribution pension is added onto this, it might be more than the amount you’re able to pass on free of inheritance tax. And that could mean inheritance tax has to be paid when you die or when your husband or wife dies.”
