What You Need to Know
The Government has now published draft legislation and guidance on the changes to the inheritance tax (IHT) treatment of unused pension funds, to take effect from 6 April 2027. These reforms mark a significant shift in the taxation of pensions and will have implications for Personal Representatives (PRs) of estates, Pension Scheme Administrators (PSAs), and Beneficiaries.
Current Position
Under the current rules, most unused pension pots held in discretionary schemes do not form part of a deceased’s estate for IHT purposes. This provides individuals with surplus pension savings the opportunity to use pensions as a tax planning tool, for example by nominating non-IHT exempt beneficiaries to inherit unused pension funds on death.
Most pensions are discretionary, but certain schemes, such as NHS pensions are non-discretionary and currently fall within the scope of IHT, creating some disparity on the IHT treatment of pensions.
What’s Changing?
From 6 April 2027, most unused pension funds, whether held in discretionary or non-discretionary schemes, will become subject to IHT, unless specific exemptions apply.
The Government cites that impacts of the reforms are expected to include:
- 10,500 additional estates to fall within the IHT regime
- 38,500 existing chargeable estates expected to pay higher IHT; and
- An average increase in IHT liability of approximately £34,500 per chargeable estate
These changes will introduce a layer of complexity for those dealing with unused funds on death, and will require closer coordination between PRs, PSAs, and beneficiaries.
Exemptions
Certain pension benefits will remain outside the IHT scope, including:
- Death-in-service payments (both discretionary and non-discretionary schemes)
- Dependents’ scheme pensions
- Joint life annuities
Spousal and charitable exemptions for IHT shall continue to apply where relevant.
New Duties for PRs and PSAs
Some of the key administrative responsibilities will include:
- PRs (Personal Representatives) will be responsible for reporting and paying IHT on unused pension pots
- PSAs (Pension Scheme Administrators) will be required to:
- Value the pension assets and provide this information to PRs within four weeks of notification
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- Pay any IHT due directly to HMRC within 3 weeks of a request from the beneficiary of the pension fund
- Beneficiaries may also become involved in the payment process in certain scenarios.
Payment Options
For flexibility, three IHT payment routes will be available:
- By PRs using estate funds, with a right to reimbursement from the pension scheme
- By PSAs directly to HMRC, at the request of the beneficiaries
- Mandatory PSA payment if the PR or beneficiary request goes unpaid after 3 weeks — shifting the burden of liability from the beneficiaries to the PSA
The practical coordination required between PRs, PSAs, and beneficiaries will introduce new challenges. The estimated additional annual compliance cost for professional PRs and PSAs is expected to be £5 million, with an initial transition cost of £60 million.
HMRC has committed to providing clear guidance to assist with mitigating the burden on PRs and PSAs, with an online calculator, and a streamlined payment system, although precise details remain to be confirmed.
What can you do to prepare?
Individuals and professionals should begin preparing now for the changes:
- Seek Professional Advice Early
Review your current estate planning approach to pensions, particularly how surplus pension income is used, gifted, or retained. Financial planners, tax specialists, and solicitors should collaborate on tailored advice for clients. - Review Pension Nominations
Ensure your nomination forms are up to date and reflect your current wishes and IHT plan. - Update Wills
Consider revisiting your Will if pension nominations are adjusted, to ensure your estate is distributed as intended and in an IHT efficient manner. Letters of Wishes detailing pension arrangements and beneficiary preferences could support your Will and streamline decision-making after death. - Prepare professional processes
Professional PRs should establish robust internal systems to handle the additional administrative burdens and deadlines. - Understand the Reporting & Payment Obligations
PSAs and PRs should stay up to date on HMRC announcements, guidance, and tools as they become available in the lead-up to April 2027.
Need Advice?
Please get in touch with our team for advice as to how these reforms might affect you and the steps you could take now to mitigate the impact.
Natasha Southam, Senior Associate