Here is a question I get asked almost every week in my office in the Algarve: “If something happens to me, what actually happens to my UK pension — and how much of it will my family lose to tax?” It is one of the most important questions an expat can ask, and from April 2027 the answer is changing in a big way.

For years, UK pensions were one of the most tax-efficient ways to pass wealth to the next generation. That is about to change. In this guide I will walk you through how UK pension death benefits work today, what the 2027 inheritance tax reform means, and the extra wrinkles that apply specifically when you — or your beneficiaries — live in Portugal.

How UK Pension Death Benefits Work Right Now

When you die, what happens to your remaining pension pot depends mostly on the type of pension you hold and your age at death. For modern defined contribution pensions — personal pensions, SIPPs and most workplace schemes — the pot does not simply disappear. It passes to whoever you have nominated.

The crucial dividing line under the current rules is age 75. If you die before age 75, your beneficiaries can usually inherit the pension completely free of UK income tax, whether they take it as a lump sum or as ongoing drawdown, provided it is paid out within two years. If you die at or after 75, your beneficiaries still inherit the pot, but any money they draw from it is taxed at their own marginal rate of income tax.

This is why pensions have been such a powerful estate planning tool. Until now, money left inside a pension has sat completely outside your estate for inheritance tax (IHT) purposes. Many advisers — myself included — have for years suggested clients spend other savings first and leave the pension untouched, precisely because it could pass to children and grandchildren so efficiently.

The Big Change: Pensions Enter Inheritance Tax from April 2027

Following the UK government’s reforms, from 6 April 2027 most unused pension funds and death benefits will be brought inside the value of your estate for inheritance tax purposes. This is one of the most significant pension changes in a generation, and if you have built up a substantial pot it deserves your attention now, not in 2027.

In plain English: the pension money that has been sitting safely outside IHT will, from that date, be added to everything else you own when working out whether IHT is due. With the standard nil-rate band frozen at £325,000 and IHT charged at 40% above your available allowances, a healthy pension can push an estate that was previously below the threshold well into taxable territory.

The government’s own figures give a sense of the scale. Of roughly 213,000 estates with inheritable pension wealth in 2027-28, around 10,500 are expected to face an IHT bill where previously they would have had none, and another 38,500 will pay more than before. On average, the affected estates are expected to see their IHT liability rise by around £34,000.

There are some important carve-outs. Death-in-service benefits paid from a registered scheme are excluded, as are dependants’ scheme pensions from defined benefit arrangements. Critically, the long-standing exemption for assets passing to a surviving spouse or civil partner is being kept — so a pension left to your husband or wife can still pass free of IHT, just as the rest of your estate can. The same applies to gifts to registered charities. You can read the government’s own technical note on the GOV.UK inheritance tax and pensions page.

What This Means If You Live in Portugal

Here is where it gets genuinely complicated, and where I see expats get caught out. UK inheritance tax does not care where you live — it cares about your domicile. Most British expats in Portugal retain a UK domicile of origin for a very long time, sometimes for life, even after decades abroad. That means your worldwide estate, including your UK pension from 2027, can remain within the reach of UK IHT.

Portugal, by contrast, does not have an inheritance tax in the traditional sense. It has “stamp duty” (Imposto do Selo) at 10% on certain inherited assets, but — and this is the part people love — transfers to a spouse, children, parents and other direct family are exempt. So a pension passing to your children may face no Portuguese tax at all, while still potentially facing 40% UK IHT from 2027. Understanding which system bites, and when, is essential.

The income tax side matters too. If you die after 75 and your beneficiary lives in Portugal, the question of where they pay income tax on withdrawals depends on the UK-Portugal double tax treaty and their own residency status. This is exactly the kind of cross-border interaction that a generic UK adviser, with no knowledge of the Portuguese system, will usually miss.

Steps You Can Take Before 2027

The good news is that you have time to plan, and there are several legitimate, sensible strategies worth discussing with an adviser:

1. Review your expression of wish forms. These tell your pension scheme who should receive your benefits. Many people filled theirs in years ago and never updated them after a house move, marriage, or new grandchild. An out-of-date form can send money to the wrong person — or force it through your estate unnecessarily.
2. Reconsider the “spend everything else first” approach. The old logic of preserving the pension at all costs may no longer hold after 2027. For some clients, drawing pension income earlier — and using your annual gifting allowances — will be more efficient.
3. Use your gifting allowances. Gifts that fall outside your estate after seven years remain a core IHT planning tool, and pension withdrawals can fund them.
4. Make full use of the spousal exemption. Structuring who inherits what, and in which order, can defer or reduce the eventual bill.
5. Get cross-border advice. The interaction between UK IHT, Portuguese stamp duty and the double tax treaty is genuinely intricate. This is not a DIY area.

For context on how the UK rules sit within the wider tax picture, the official HMRC inheritance tax guidance is a useful starting point, though it will not address the Portuguese angle.

A Word on the Withholding Mechanism

One practical detail worth knowing: from 2027, where personal representatives expect IHT to be due, they will be able to instruct pension scheme administrators to withhold up to 50% of the taxable benefits for up to 15 months from the date of death, settle the IHT with HMRC, and then release the balance. In practice this means beneficiaries may wait longer to receive the full value of an inherited pension. Planning ahead — and keeping good records — makes that process far smoother for the family you leave behind.

Frequently Asked Questions

Will my UK pension be taxed in Portugal when I die?

Portugal does not levy inheritance tax in the usual sense. Transfers to a spouse, children or parents are exempt from Portuguese stamp duty. However, your pension may still face UK inheritance tax from April 2027 if you retain a UK domicile, which most expats do.

Does the before-75 and after-75 rule still apply?

Yes. The age-75 dividing line affects income tax on withdrawals by your beneficiaries and is separate from the new IHT charge. From 2027 you could, in theory, face both an IHT charge on the pot and income tax on later withdrawals if you die after 75 — which is why planning matters.

Is a pension left to my spouse still tax-free?

For inheritance tax, yes — the spousal exemption is being retained, so a pension passing to a surviving husband, wife or civil partner can still pass free of UK IHT.

I have lived in Portugal for 20 years. Am I still UK-domiciled?

Quite possibly. Domicile is sticky and is not the same as tax residency. Many long-term expats remain UK-domiciled for IHT purposes. It is worth getting your specific position assessed rather than assuming you have shed it.

What to Do Next

The headline is simple: from April 2027 your UK pension is likely to count towards inheritance tax, the old “leave the pension till last” rule may no longer be the smart move, and the cross-border interaction with Portugal needs careful handling. The time to review your plan is now, while you still have years to act.

If you’d like to discuss how this affects your personal situation, get in touch with our team. We specialise in helping UK expats in Portugal make the most of their pensions and investments.

Matthew Renier is a Chartered Financial Adviser at Arthur Browns Wealth Management, based in the Algarve, Portugal. He has over 20 years of experience helping British expats manage their pensions and financial planning across borders.

Contact us