The government has announced a major shift in how pensions will be treated for Inheritance Tax (IHT) purposes. From 6 April 2027, most unused pension pots and certain pension death benefits will be counted as part of the deceased’s estate for IHT purposes. This change will affect thousands of estates and could significantly increase the tax due on inherited pension savings. Here’s what you need to know – and what you can do to prepare for it.
Why the rules are changing
Until now, many pension assets – especially ‘defined contribution’ pensions – have fallen outside the IHT net, making them a useful tool for passing on wealth tax-efficiently. The government’s reforms aim to:
– Reduce the use of pensions primarily as inheritance planning vehicles, rather than as retirement savings; and
– Create greater consistency between pensions and other types of assets.
The key changes, at a glance
– From 6 April 2027, most unused pension funds and certain death benefits will be included in the deceased’s estate for IHT.
– Responsibility for reporting on and paying any IHT due will lie with the deceased’s personal representatives (executors), not with the pension scheme administrators.
– Death-in-service benefits from registered pension schemes will be excluded from the new rules, and existing exemptions for transfers to spouses, civil partners and charities will still apply.
– The government expects around 10,500 estates each year to face IHT for the first time under the new regime, with an average increase of around £34,000 of extra IHT to pay for affected estates.
Practical issues and uncertainties
Although the headline rules on pensions and inheritance tax are clear, there are still questions about:
– How the IHT-free nil-rate band and residential nil-rate band will be applied once pensions are included;
– Potential conflicts where executors must pay IHT on pension assets that they don’t directly control;
– Valuation and liquidity issues for certain pension funds; and
– The additional administrative burden on executors and beneficiaries.
Steps to consider now
While the detailed legislation is still being finalised, the general direction is clear. Now is a good time to:
– Review your beneficiary nominations to ensure your pension sits neatly alongside your Will and your overall estate plan;
– Consider drawdown options during your lifetime if appropriate, balancing IHT savings against income tax and retirement needs;
– Reassess gifting strategies and how different assets are passed on to beneficiaries; and
– Seek professional advice to understand how these changes might interact with your broader financial plan.
Our role at Chiltern Wills
At Chiltern Wills we specialise in Wills, trusts and estate planning. We can help you to review your existing arrangements and ensure that your Will and beneficiary nominations are coordinated to minimise tax exposure and future complications. Contact us to see how we can help you with Wills, Lasting Powers of Attorney or Probate.
Important disclaimer: Chiltern Wills is not authorised to provide pensions advice nor financial advice. This article is for general information only. You should consult a suitably qualified Independent Financial Adviser (IFA) for advice tailored to your individual circumstances.
