For decades UK pension savings have operated under a fairly simple principle: you save for retirement and, so long as you die before the age of 75 (or even after), your unused pension can generally be passed on to loved ones free of Inheritance Tax (IHT). This advantage made pensions one of the few major wealth-holding vehicles that could escape IHT entirely in many circumstances. That era is ending.
From 6 April 2027, the UK government will change the treatment of most unused pension funds and pension death benefits so that they will be included in the deceased’s estate for IHT purposes. HM Revenue & Customs will tax these pensions as part of the estate at the standard rates once values exceed the IHT thresholds — currently 40% above the nil-rate band.
This fundamental shift is intended to close what policymakers see as a distortion: pensions have long been used not only for retirement savings but as wealth-transfer vehicles that largely avoided IHT. Yet the practical implications will be profound and unavoidable for executors, administrators of estates and beneficiaries alike.
What Exactly Is Changing?
Under today’s system, most defined contribution pension pots and many defined benefit death benefits are not part of the deceased’s IHT estate simply because of the way pensions are treated legally. Whether or not pension trustees have discretion over the payment, unused pension funds tend to fall outside estate IHT valuations.
From 6 April 2027, that exemption ends for most cases. Most unused pension funds — absolutely including those held in SIPPs, personal pensions and workplace defined contribution schemes — will be brought into the estate’s value for IHT purposes regardless of discretion or trust structure. The result is that these pensions may push an estate over the nil-rate band and create a substantial tax bill at 40%.
A few critical exceptions will remain:
• Death-in-service benefits payable from registered pension schemes (typically insurance-style lump sums paid to dependants after a work death) may still be exempt from IHT.
• IHT exemptions still apply for transfers to a surviving spouse or civil partner.
• Charitable recipients also remain exempt.
Why This Will Be a Headache for Executors and Estate Administrators
The change looks simple on paper — include pensions in the IHT estate — but the practical administration will make estate settlement more complex than ever.
- New Responsibilities for Personal Representatives
Historically, pension administrators handled most reporting of pension death benefits and could pay benefits before any IHT process touched the estate. From April 2027, personal representatives (PRs) — the executors or administrators of the deceased’s estate — along with pension scheme administrators, will be the ones responsible for reporting and paying IHT due on pensions.
That creates two big challenges:
- PRs may have little or no experience dealing with pension administrators about valuations and tax reporting.
- Pension providers will now need to respond to PR requests for benefit values, percentages payable to different beneficiaries, and details needed to calculate IHT on pension elements.
Pension scheme administrators will have new duties to provide valuations and support PRs, but this process is both new and (in many cases) untested in large volumes.
- Valuation Challenges
Unlike a share portfolio or property, a pension pot may be complex to value. Deciding exactly what portion of a pension (especially one in drawdown or containing guarantees) falls into the estate — and which portion may qualify for exemptions — will create uncomfortable delays for probate.
HMRC will require accurate valuations to calculate IHT, yet pension administrators often struggle to give timely figures even for routine death benefits now. This new requirement will add to that load.
- Liquidity and Timing Headaches
Inheritance Tax must generally be paid within six months of death to avoid interest and penalties. With pensions now involved, PRs will often need to cobble together information from multiple pension schemes, trustees and beneficiaries before they can complete the IHT return.
If delays occur (and early industry commentary suggests they will), executors may find themselves facing HMRC deadlines long before they have full clarity on what pension wealth exists and how it should be taxed.
Options for Paying the Inheritance Tax on Pension Death Benefits
The government recognises that personal representatives and beneficiaries will need flexibility when paying the IHT due on pension death benefits, and there are three broad approaches that PRs and beneficiaries will be able to consider:
- Payment from the free estate — PRs settle the IHT from the non-pension estate assets first. If a pension beneficiary isn’t part of the free estate, PRs can seek reimbursement for the pension-related tax from the beneficiary.
- Direct Payment Scheme (DPS) — Beneficiaries can instruct pension scheme administrators to pay the IHT directly to HMRC from the pension funds before any other benefits are released. This is often the “cleanest” route because it reduces the complexity of estate assets moving around.
- Beneficiary pays directly — Pension beneficiaries can settle their tax liabilities themselves, either by withdrawing from the pension or using other personal resources.
Numerically, all these options are designed to be broadly neutral; the outcome for overall tax paid is the same once £ is assessed. The difference lies in cash flow, timing and administrative burden.
What is certain is that PRs will need to coordinate tax payments, estate distributions and pension payouts with much more careful oversight than at present — and this is before we even start talking about problems where a beneficiary refuses to reimburse tax or missing pension records that only surface after probate is nearly complete.
Tax Planning to Mitigate the Impact
Given the scale of this reform and the fact that it will apply to deaths on or after 6 April 2027, planning opportunities are limited — but there are a few sensible approaches that high-net-worth individuals and families should consider now:
- Review Beneficiary Nominations Now
Having up-to-date and clear pension beneficiary nominations (and making sure these interact with wills and estate planning intentions) will be vital. Avoiding ambiguity on who gets which pension benefit can reduce disputes between the estate and pension beneficiaries, which in turn reduces delays.
- Consider Early Drawdown or Partial Crystallisation
For large pension pots, there may be cases where taking funds earlier (before 2027) — especially in a tax-efficient way — could reduce the unused pension value that would attract IHT. This is highly personalised advice territory and must be done carefully, but the opportunity may exist.
- Look at Lifetime Gifts Where Appropriate
If you have surplus liquidity outside pensions, making use of annual gift allowances, potentially with a view to seven-year gift exemptions, can still reduce the size of the eventual IHT estate. This isn’t specific to pensions, but in the context of bigger estates it is a useful tool.
- Pension benefits after death
Beneficiaries of pension benefits are likely to be better off maximising what is held in the pension and therefore paying IHT from other sources as future growth will be tax free unlike for other assets in the estate. The tax advantages are even greater if death is before age 75.
After Age 75: Double Tax Risk?
It’s important to recognise that for deaths after age 75, beneficiaries may also face income tax on pension withdrawals at their marginal rate. This on top of IHT can result in very high effective tax rates — sometimes exceeding 60% or more in aggregate on the same pool of pension assets depending on beneficiary tax bands. This double taxation potential is one of the reasons why careful planning before age 75 is particularly valuable.
Professional Advice Is Now Essential
The inclusion of pension death benefits and unused pension funds in the UK’s inheritance tax regime from April 2027 marks a generational change in wealth transfer tax rules. For beneficiaries, executors and personal representatives the reforms create administrative complexity, timing pressures and potentially significant tax bills that simply didn’t exist before.
The options for paying the tax — whether from the free estate, via the Direct Payment Scheme, or by beneficiary settlement — each come with their own pros, cons and pitfalls. Any misstep in sequencing or reporting could delay probate, incur HMRC interest and penalties, or unintentionally erode the value transferred to heirs.
Against this backdrop, professional advice is no longer optional, it’s essential. Individuals should revisit pension nominations and estate planning now, and executors must prepare for new responsibilities that will follow these rules. With the changes just over a year away, failing to plan could leave loved ones facing needless complexity and tax.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
