Pension inheritance tax from April 2027: what public sector pension members need to know

By James Heppe-Smith · 14 May 2026 · 11 min read

What this article covers

• Does: Explain what HMRC’s 11 May 2026 technical note actually says, which parts of a public sector pension are caught by the new inheritance tax rules from 6 April 2027 and which are not, the new “withholding notice” mechanism, and why executors rather than scheme administrators now carry the IHT-reporting burden.
• Doesn’t: Cover general estate planning, the basics of inheritance tax thresholds, or trust structures. For broader UK estate planning, see our sister site Savvy Investor Guide. This article focuses specifically on what public sector scheme members need to understand.
• If you need advice: Use MoneyHelper for free guidance, or speak to an FCA-authorised adviser or a chartered tax adviser for decisions tied to your circumstances.

On Sunday 11 May 2026, HMRC published a technical note setting out, for the first time in detail, how unused pension funds and pension death benefits will be treated for inheritance tax from 6 April 2027. For members of the seven main UK public sector pension schemes (NHS, Teachers, Civil Service, Armed Forces, Police, Firefighters, and the Local Government Pension Scheme), the headline news is reassuring on the main pension entitlement and uncomfortable on the edges. Defined benefit pensions in payment remain outside the IHT net. So do non-discretionary death-in-service lump sums. Where the new rules bite is on Additional Voluntary Contribution (AVC) pots, unused defined contribution pots, and any pension cash held in trust at the date of death. The technical note also confirms a mechanism scheme administrators always insisted would be unworkable but is now policy: from April 2027, executors of the estate, not pension scheme administrators, carry the reporting and payment burden. Schemes will be able to withhold up to half of an unused pot until the IHT position is settled.

What HMRC announced on 11 May

The technical note (published on GOV.UK as Inheritance Tax on pensions: technical note) is a 30-page document setting out, in unusually concrete terms, how His Majesty’s Revenue and Customs intends to operationalise the policy decision taken at the Autumn 2024 Budget that unused pension funds should fall within the IHT net. Until now, the published material had been a one-paragraph policy statement and a heavily-criticised October 2024 consultation. The 11 May note is the first time HMRC has explained, mechanically, how the rules will actually work.

The headline changes from earlier proposals are three. First, personal representatives (executors) of the estate, not pension scheme administrators, will be responsible for reporting and paying any inheritance tax due on pension assets. The October 2024 consultation proposed loading this onto schemes, and the pensions industry response was that the duty would be unworkable, particularly for legacy public sector schemes with limited IT capacity. HMRC has now agreed. Executors do the work.

Second, schemes will be able to issue a withholding notice on any unused pot, holding back up to 50% of the value until the executor confirms either that no IHT is due or that any tax has been paid. This is the operational solution to a real problem: if a scheme pays out the full pot to a nominated beneficiary on day one and the IHT bill arrives six months later, there is no money left to pay it from.

Third, the note clarifies which pension types are within scope and which are not. For public sector scheme members this is the most consequential part of the document. The summary is in the next section.

The note also confirms that final guidance and the draft secondary legislation will not appear until spring 2027, around one month before the rules go live on 6 April 2027. Several technical questions remain unresolved, including the exact treatment of overseas pension transfers, the position of pension sharing orders made before April 2027, and how dependants’ pension uplifts interact with the residual pot. These will be set out in the draft regulations.

What this means for public sector pension members

The structure of the seven main UK public sector schemes (NHS, Teachers, Civil Service, Armed Forces, Police, Firefighters, and the LGPS) is built around three different kinds of payment: the main defined benefit pension itself, lump sums payable on death, and (in some cases) Additional Voluntary Contribution pots. The new rules treat each of these differently.

What stays outside the IHT net

Three categories of public sector pension money are confirmed as outside IHT from April 2027.

• The main DB scheme pension in payment. The pension you draw monthly after retirement is income, taxed under PAYE, and stops when the rules of the scheme say it stops (typically on your death, or on the death of the surviving spouse or eligible dependant where a continuing pension applies). It is not part of your estate. It never has been, and the new rules do not change this. The same applies to commuted lump sums you have already taken (because they were already paid to you before death, they are part of the cash or assets in your estate, but they are no longer pension money in HMRC’s sense).
• Survivor pensions and dependants’ pensions. The continuing pension paid to a spouse, civil partner, or eligible dependant after a member’s death is also income to the recipient and is outside IHT. The same applies to children’s pensions under any of the schemes’ standard rules.
• Standard death-in-service lump sums. Where a non-discretionary public sector scheme (NHS, Teachers, Civil Service alpha, AFPS, Police, Firefighters, and the LGPS) pays a death-in-service lump sum at the discretion of the scheme trustee or scheme manager rather than as of right to the member’s estate, that lump sum is outside IHT. This is because the trustee’s discretion means the money was never legally the member’s to bequeath. The scheme rules govern who receives it. Members nominate beneficiaries, but the trustee can override the nomination, and that legal feature is what keeps the lump sum outside the IHT net.

If you have not completed a nomination form for your scheme, now is a good moment to do so. Not because the new rules require it, but because an up-to-date nomination is the most useful single document the scheme has when you die. Most schemes call this an “Expression of Wish” or “Nomination” form. It is not a will. It tells the scheme who you would like to receive your death-in-service lump sum. The trustee retains discretion, but in practice a written nomination is followed in the great majority of cases.

What is caught

Two categories of public sector pension money are caught by the new rules.

• Additional Voluntary Contribution (AVC) pots. Most of the main schemes offer an AVC arrangement: a defined contribution pot that you build up alongside your DB benefits, usually through Prudential, Standard Life, or a similar provider, with contributions taken from your salary by your employer. The pot itself is yours in a way that the DB pension is not. You choose how it is invested, you can transfer it, you can take it as a lump sum at retirement. From April 2027, any unused balance in an AVC pot at the date of your death will form part of your estate for IHT purposes, in the same way as any other defined contribution pension would. The exception is the AVC pot used to fund a tax-free lump sum at retirement: that is paid before death and is not relevant here.
• Unused defined contribution pots held alongside or in place of the main scheme. Some public sector members have a DC pension from previous private sector employment, or from a Civil Service partnership pension arrangement, or from a SIPP they have set up themselves. Any of those that remain at the date of death are caught. The same applies to undrawn drawdown pots, even where the member had started drawing from them and left an unused balance.

The combined tax rate for over-75s

One detail worth being explicit about. If you die after age 75 and you have an unused defined contribution pot (an AVC pot, or any other DC arrangement), the beneficiary already pays income tax on withdrawals at their marginal rate under current rules. From April 2027, the pot will also be inside the IHT net before it reaches the beneficiary. The combination can produce a headline marginal rate of around 64% to 67% on the affected pot, depending on the beneficiary’s income tax band. HMRC’s technical note acknowledges this and confirms it is intentional: the policy aim is to remove the longstanding advantage of using a pension as an inheritance wrapper rather than as a retirement vehicle.

What this means in practice depends on your circumstances and is the kind of decision that does benefit from regulated advice. Some members may consider drawing down an AVC pot earlier than they otherwise would, to crystallise it before death. Others may not. Either way it is a decision tied to your particular numbers, your other income, your tax position, and your family circumstances, not a question on which a general site can offer a useful answer.

The withholding notice: the new operational mechanism

The single most novel feature of the 11 May technical note is the withholding notice. It is the mechanism HMRC has settled on to solve the problem that pension schemes do not, at the date of death, know whether IHT will be due on the pot, because that depends on the size of the estate as a whole and on the residual nil-rate band available to the deceased.

The mechanism works like this. When a member dies, the scheme administrator is notified. The scheme then has the option to issue a withholding notice to any nominated beneficiary of an unused defined contribution pot, including an AVC pot. The notice allows the scheme to retain up to 50% of the pot value until one of three things happens. Either the executor confirms that the estate is below the IHT threshold and no tax is due, or the executor confirms the IHT due on the pot has been paid, or twelve months pass with no contact from HMRC and the scheme can release the withheld funds.

For public sector schemes, the practical impact depends on what the scheme administrator decides to do. Some administrators may issue withholding notices on every unused DC pot above a small threshold as a matter of course. Others may use a risk-based approach, only withholding where the pot value or the estate size suggests IHT may be due. The technical note does not mandate one approach. It will be a matter for each scheme administrator and, in some cases, a matter for individual nominated beneficiaries who may need to engage with the executor to release the funds.

For beneficiaries, the practical lesson is that even where you are nominated to receive an AVC pot from April 2027 onwards, you should not assume the full amount will be paid out within days. Up to half may be held back, potentially for months, while the IHT position is sorted out by the executor of the estate.

Why executors carry the burden

The October 2024 consultation proposed that pension scheme administrators would be responsible for valuing the unused pension, calculating the IHT due, and paying it to HMRC. The industry response, including from the public sector scheme administrators, was that this would be operationally unworkable. Schemes hold information about pension pots, not about estates as a whole. To calculate IHT on a single pot, an administrator would need to know the total value of the estate, the residence nil-rate band position, gifts made within seven years of death, the spouse exemption, and any other factors. That data lives with the executor, not the scheme.

HMRC has now agreed. From April 2027, the personal representative (executor) of the estate is responsible for reporting the value of any unused pension to HMRC as part of the standard probate process, calculating any IHT due, and arranging payment. The scheme’s only direct role in the process is to provide the value of the pot at the date of death on request and, if it chooses, to issue a withholding notice protecting up to 50% of the pot value until the executor confirms the position.

This is a significant change in the burden of administration. For public sector members it has two consequences. First, naming an executor who is willing and capable of handling a more complex probate process matters more from 2027 onwards than it did before. Second, keeping good records of all pension arrangements (the main scheme, any AVC, any private DC pots, any SIPP) is now a useful piece of estate preparation. The executor needs to be able to find these in order to do the new job they have been given.

A worked example: an NHS member with an AVC pot

To make the mechanics concrete, here is a stylised example. The figures are illustrative; they are not meant to model any individual’s actual position.

Sarah is a 78-year-old retired NHS nurse who died in May 2027, a month after the new rules took effect. She had three pension-related sources of income and assets at the date of death: her NHS Pension Scheme pension of £18,000 a year (still in payment), a small Prudential AVC pot of £45,000 (untouched since retirement), and a SIPP from a private-sector job earlier in her career holding £62,000. Her main estate (house, savings, ISA) is valued at £510,000.

Treatment under the new rules:

• The NHS pension stops on her death (subject to any survivor pension to her husband, which is treated as income to him under PAYE). It is outside the IHT calculation.
• The £45,000 AVC pot is reported by Sarah’s executor as part of her estate. Prudential issues a withholding notice protecting £22,500 of the pot.
• The £62,000 SIPP is also reported by the executor. The SIPP provider issues a similar withholding notice protecting £31,000.
• The total estate for IHT purposes is therefore the house and savings (£510,000) plus the two pension pots (£107,000), giving a total of £617,000.
• Sarah was a widow whose husband had pre-deceased her without using his nil-rate bands. She therefore has a transferred nil-rate band giving her £650,000 of tax-free allowance overall. Her estate is below that threshold. No IHT is due.
• The executor confirms this to Prudential and the SIPP provider. The withholding notices are released. Sarah’s beneficiaries (her two children) receive the full £107,000 from the pension pots. Income tax applies to withdrawals at the children’s marginal rate because Sarah died after age 75. That part of the tax position is unchanged from current rules.

If Sarah’s estate had been larger, or if she had not had a transferred nil-rate band from her husband, the calculation could have produced an IHT bill on the pension pots that the executor would have needed to pay before the withholding notices were released. The income tax position on the children’s withdrawals would have been the same. The combined effective tax rate on the pension money in that scenario could have been around 64% to 67%, depending on the children’s tax bands.

Timeline to April 2027

• 11 May 2026: Technical note published. (You are here.)
• Summer 2026 onwards: Pension schemes and scheme administrators redesign processes, train staff, and update member communications. AVC providers update beneficiary nomination workflows.
• Spring 2027 (March / early April): HMRC publishes final guidance and draft secondary legislation. The remaining technical questions (overseas transfers, pre-existing pension sharing orders, dependants’ pension interactions) are clarified.
• 6 April 2027: New rules take effect for deaths occurring from that date.
• From April 2027: First withholding notices issued. Executors begin reporting unused pension pots as part of probate.

Common questions

Pension Plain’s take

The 11 May technical note is, for once, a piece of HMRC communication that is more reassuring than the policy headline suggested it would be. The main public sector pension (the DB monthly pension you build up over your career, plus its survivor and dependant continuations) is confirmed outside the IHT net. So is the standard death-in-service lump sum from each of the seven main schemes, because trustee discretion keeps the money outside the deceased’s estate as a matter of trust law. For most NHS, Teachers, Civil Service, Police, Firefighters, and LGPS members whose pension arrangements are entirely within their main scheme, the new rules will be a non-event.

Where the rules bite is on the AVC pot, and on any defined contribution pension money held outside the scheme. The bite is sharpest for over-75s whose beneficiaries face the income tax overlay as well as the IHT charge. The combined effective rate of 64% to 67% on the affected pot is real and is the deliberate policy outcome. If your AVC pot is a meaningful part of your retirement provision and not just a small top-up, this is the conversation worth having with a regulated adviser. Pension Plain doesn’t tell you what to do about it because what to do about it depends on numbers and circumstances this site does not know.

The procedural shift, executors rather than scheme administrators, is the right answer. Schemes hold pot data, not estate data. The October 2024 proposal to load IHT calculation onto scheme administrators would have produced years of operational pain for limited tax yield. The withholding-notice mechanism is a sensible compromise between HMRC’s need to collect the tax and beneficiaries’ need to receive their money. The cost of the compromise is that beneficiaries may wait months for the second half of an AVC pot while probate is sorted out. That is worth being aware of in advance.

One practical action point applies to almost every member, regardless of whether you have an AVC pot or not. Check your scheme nomination form. If your circumstances have changed (marriage, divorce, new children, a beneficiary’s death), and the nomination on file is out of date, update it. From April 2027 onwards, the cost of having an unclear or outdated nomination is higher than it was before, because the trustee, the executor, and HMRC will all be using whatever paperwork exists. Updating a nomination form takes ten minutes. It is, in cost-benefit terms, the most useful piece of estate preparation most public sector pension members can do.

Key official sources

• Inheritance Tax on pensions: technical note (GOV.UK, 11 May 2026). The primary source for this article.
• Inheritance Tax: the basics (GOV.UK). Background on thresholds, nil-rate bands, and the standard estate process.
• MoneyHelper — what happens to your pension when you die. Free, independent guidance covering both DB and DC arrangements.
• Pension Plain: UK public sector pensions explained (cross-cutting context).
• Pension Plain: NHS Pension Scheme, Teachers’ Pension Scheme, Civil Service Pension Scheme, Armed Forces Pension Scheme, Local Government Pension Scheme (LGPS).
• Sister site: Savvy Investor Guide — Pension Inheritance Tax 2027: UK Estate Planning Guide (general, non-public-sector context).

Fact-checked 14 May 2026.