What Happens to a SIPP on Death After April 2027?
Peter Rose APFS · Chartered Financial Planner · Aetas Wealth · April 2026 · 9 min read
For decades, the SIPP has been one of the most powerful estate planning tools available to financial advisers. Funds held inside a Self-Invested Personal Pension passed outside the estate on death, free of inheritance tax, and — if the member died before 75 — free of income tax too. That position changes fundamentally from 6 April 2027.
Finance Act 2026, which received Royal Assent on 20 March 2026, brings all unused defined contribution pension funds — including SIPPs — into the inheritance tax estate. For the first time, unused pension funds will be subject to the full IHT regime. For clients over 75, the combined IHT and income tax charge on residual SIPP funds can reach 67% in a standard scenario, and over 80% in the most severe cases.
What changes on 6 April 2027
Under the current rules (pre-April 2027), unused SIPP funds fall outside the estate for IHT purposes. HMRC treats them as sitting outside the client’s estate because the pension trustee — not the member — has discretion over who receives the death benefits. This discretionary nature means the funds are not “owned” by the member in a way that attracts IHT.
Finance Act 2026 removes this treatment. From 6 April 2027, unused SIPP funds are brought into the estate and subject to IHT at 40% on amounts above the available nil-rate band. The pension trustee’s discretion does not prevent the IHT charge from arising.
The income tax layer — the problem for over-75 clients
Before April 2027, death benefits from a SIPP were tax-free if the member died before age 75 (paid as a lump sum or drawdown). For members who died aged 75 or over, death benefits were taxed as income in the hands of the beneficiary at their marginal income tax rate.
From April 2027, the IHT charge applies first, at 40% on the value of the fund above the available nil-rate band. The residual fund — what remains after IHT — is then paid to the beneficiary and taxed as their income at their marginal rate. For a beneficiary paying income tax at 45%, the two charges combine to produce an effective rate of 67% on the portion of the fund subject to IHT.
Does the nil-rate band help?
The IHT nil-rate band (£325,000 per individual, with the residence nil-rate band applying separately to property) will apply to the estate as a whole — including the pension fund. Where the nil-rate band has already been absorbed by other assets in the estate, the SIPP fund will be subject to IHT at 40% in full. Where the client has a surviving spouse and elects to transfer the nil-rate band, the combined threshold may provide some relief — but for clients with significant assets alongside their pension, the band will frequently be exhausted before the SIPP is considered.
Does the spousal exemption apply?
Transfers between spouses remain exempt from IHT. Where a SIPP member nominates their surviving spouse as the beneficiary, the IHT charge does not arise on first death. However, this is a deferral, not an elimination. The surviving spouse then holds the pension fund — and on their subsequent death, the full IHT charge applies. For many clients, the spousal exemption simply moves the problem to the next generation.
What about crystallised funds and drawdown?
The Finance Act 2026 changes apply to all unused DC pension funds on death, including funds that are already in drawdown (flexi-access drawdown). The distinction between uncrystallised and crystallised funds is removed for IHT purposes from April 2027. A fund in drawdown that has not been fully withdrawn will be subject to the same IHT treatment as an uncrystallised SIPP.
The solution — eliminating both taxes
The Flexible Pension Annuity (FPA) is a unit-linked pension annuity structured through a Gibraltar Protected Cell Company (PCC). It eliminates income tax on death benefits from day one of transfer, and IHT after a two-year qualifying period through Business Property Relief under s105(1)(bb) of the Inheritance Tax Act 1984.
The transfer process is straightforward — the FPA is available on ORIGO, the standard pension transfer platform, so existing SIPP providers can transfer funds using their normal process. There is no need to liquidate investments or disrupt the client’s income arrangements. The FPA functions identically to a drawdown arrangement during the client’s lifetime.
The timing issue — why April 2027 matters now
The BPR qualifying period is two years from the date of transfer. For a client who transfers to the FPA in April 2025, the two-year clock has already passed. For a client who transfers in April 2026, the BPR qualification is achieved in April 2028 — twelve months after the legislation takes effect, but well before most clients’ planning horizon. For a client who waits until after April 2027, the two-year clock starts then — and for clients aged 75 or over, any death within those two years leaves the estate exposed to the full double whammy charge.
Income tax elimination applies from day one of transfer — so even before the two-year BPR qualification is achieved, the income tax layer is removed immediately.
Action points for advisers
- Identify affected clients: Review your client bank for DC pension holders with funds above £100,000, particularly those aged 55+ with non-spousal beneficiaries.
- Prioritise over-75 clients: For clients aged 75 and over, both the IHT and income tax charges apply simultaneously. These clients have the most to lose and the least time to act.
- Review Expression of Wishes forms: These do not alter the IHT position. Where clients believe they have “sorted” their pension nominations, they need to understand that the nomination does not prevent the IHT charge.
- Consider the spousal exemption carefully: For married clients, the first death may be exempt — but the second death creates the full exposure. Planning should account for both deaths.
- Document all conversations: Consumer Duty requires advisers to act in clients’ best interests. Where a client has a material pension IHT exposure, the conversation should be documented regardless of what the client decides.