Pension transfers and inheritance tax: an ordinary transfer is rarely taxed, but one made in ill health can be a transfer of value that HMRC looks at.
The short answer is that an ordinary transfer between schemes does not usually create an inheritance tax bill, while withdrawals change where the money sits. Free, impartial, government-backed guidance on taking money out is available from Pension Wise. Where a transfer and a larger estate are both involved, an FCA-authorised adviser can consider them side by side, and a call-back, which costs nothing, can be requested via this page's enquiry form.
Does a pension transfer affect inheritance tax?
Not in the ordinary case. HMRC's Inheritance Tax Manual explains that a member has a statutory right to move a pension fund from one scheme to another, and that "the funds do not rejoin the member’s estate during transit." What the estate holds at that point is the right to decide how death benefits are paid by the new scheme.
That right is where tax can arise. The Manual says: "If a person is in normal health at the date of the transfer then the loss to the estate is nominal. If they are in ill-health at the date of the transfer then the loss may be significant." So the question is the member's health on the day of the transfer, not the transfer itself.
Our guide to transferring a pension, step by step covers the practical side.
Ill health on the transfer date, and the two-year look-back
Inheritance tax can apply to a "transfer of value", which the Inheritance Tax Act 1984 defines in section 3 as a disposition that leaves the person's estate worth less than it would otherwise have been. HMRC's reasoning for pension transfers is that the estate holds the right to direct how death benefits are paid, so a loss may arise if payment then goes elsewhere.
For transfers, HMRC's Manual ties any loss to the member's health on the transfer date, and says details of any transfer made within the two years before the death "should be reported on the IHT409", the form personal representatives use to report the estate. A separate Manual page, on contributions rather than transfers, says that "where contributions are made more than 2 years before a death you can assume that the member was in normal health, unless there is evidence that suggests they were not."
- Transfer within two years of death: reported on form IHT409, with health on the transfer date the question.
- Contribution more than two years before death: HMRC assumes normal health unless there is evidence otherwise.
- Large one-off contributions: the Manual singles out ones that are substantial and unusual, rather than paid under regular arrangements in place for more than two years.
Whether a particular transfer is examined, and what HMRC then decides, depends on the facts.
Leaving your pension untouched: a charge that no longer applies
Section 3(3) of the 1984 Act treats a failure to exercise a right as a disposition where it shrinks one person's estate and grows another's. HMRC's Manual accepts that, in general, this can cover someone who does not take pension benefits and so increases the death benefits paid outside the estate.
For deaths on or after 6 April 2011, though, that provision no longer applies to registered pension schemes, qualifying non-UK pension schemes or section 615(3) schemes. The Manual adds that it "can still apply to pension schemes other than those above, mainly employer-financed retirement benefit schemes (EFRBS)". So choosing not to draw a pension from an ordinary registered scheme is not treated as a disposition under that provision. A member of an employer-financed scheme can ask the scheme which category it falls into.
Do pension withdrawals affect inheritance tax?
Withdrawals matter because they change where money sits. For deaths before 6 April 2027, the starting point is HMRC's Manual: in most cases trustees or providers pay lump sums at their discretion, and "where the lump sum is discretionary it is not part of the estate or chargeable to Inheritance Tax". Inheritance tax is usually levied on the estate, meaning the property, money and possessions of the person who has died, and money taken out of a pension and kept becomes part of that. Money you spend does not.
That is why a withdrawal can raise a later inheritance tax figure even though the pension itself was outside it. Giving the money away is a separate matter, covered by the gift rules rather than the pension rules; our page on how to avoid SIPP inheritance tax sets out what is in your control. Income tax on what you take out is a separate question, covered under pension drawdown.
From 6 April 2027: what changes for transfers and withdrawals
The Finance Act 2026, which received Royal Assent on 18 March 2026, inserts section 150A into the 1984 Act. It treats a pension scheme member as "beneficially entitled immediately before their death" to notional pension property. Section 71 applies this to "deaths, and (so far as relevant) to other transfers of value within the meaning of IHTA 1984, occurring on or after 6 April 2027." HMRC's policy paper describes the effect as bringing most unused pension funds and death benefits into a person's estate for inheritance tax from that date. The full position is on pension inheritance tax in the UK.
Two points follow. First, for a death on or after that date a withdrawal no longer moves money out of an inheritance-tax-free position, because most unused funds are counted in the estate anyway. Second, how the ill-health transfer test works once an unused fund already counts in the estate is a question for a free call-back; ask for it using the form here.
Anyone being pressed to transfer for tax reasons should be wary. The FCA warns that pension scams "often involve attractive offers that aim to persuade you to transfer your pension pot (or release funds from it)"; see its pension scams page and our guide to pension scams.
A different two-year rule: paying death benefits
Do not confuse the ill-health test with the two-year limit on paying a lump sum to beneficiaries, which belongs to income tax. HMRC's Pensions Tax Manual says that for payments made before 28 October 2026 a flexi-access drawdown fund lump sum was tax-free for a member who died under 75 "provided it is paid within two years" of the scheme knowing of the death, and that "for payments made on or after 28 October 2026 there is no relevant two-year period." That rule is about income tax on the beneficiary; the other is about inheritance tax on the estate. Our pages on inherited pension tax and pension death benefits cover it.
Two-year rules and ill-health transfers: common questions
Is there a two-year rule for pensions and inheritance tax?
There are two. One is the inheritance tax look-back described above: transfers within two years of death are reported, and contributions made earlier are normally taken to have been made in normal health. The other is the income tax time limit on paying death benefits, which HMRC's manual says no longer applies to payments made on or after 28 October 2026.
Do I have to tell anyone about a transfer I made before I died?
HMRC says details of transfers made within the two years before a death should be reported on form IHT409, so keep the paperwork for any transfer.
Do regular pension contributions in later life count as a gift?
HMRC's Manual picks out contributions that are substantial and unusual, not those paid under regular arrangements that have run for more than two years. For other contributions, see pension contributions and inheritance tax.
Does moving a pension abroad change the position?
Transfers to overseas schemes have their own tax rules, covered in our guide to QROPS; check the receiving scheme and the FCA's scam warnings before agreeing to one.
Who should I ask about my own situation?
Your scheme can confirm how it pays death benefits, and Pension Wise covers your options for taking money. Thinking about a transfer and how its timing might be viewed? Ask for a no-charge call-back through the enquiry form here. On the line will be an FCA-authorised adviser, ready to go through the points above.