Changes to Inheritance Tax Treatment of Pensions from April 2027

The way pensions are treated for Inheritance Tax purposes is changing from 6 April 2027. Following the Government’s announcement in the Autumn Budget 2024, legislation has now been introduced through the Finance Act 2026, bringing most unused pension funds and pension death benefits within the scope of Inheritance Tax.

These changes could have a significant impact on how your estate is valued when you die and, in turn, the amount of Inheritance Tax your beneficiaries may have to pay. It is therefore important to understand how the new rules will operate and whether they could affect your existing pension arrangements.

What are the changes?

Since the early 2010s, pension schemes were increasingly used and marketed as an Inheritance Tax planning tool (to pass wealth on death without an Inheritance Tax charge), rather than purely as retirement funding. This is largely because many pension schemes operate under discretionary arrangements, allowing the scheme trustees or administrators to decide who should receive the benefits following the member’s death.

Under the current rules, where the pension scheme trustees or administrators have discretion over the payment of death benefits, the value of those benefits will generally fall outside the deceased’s estate for Inheritance Tax purposes. So, in many cases, pension funds can be passed to beneficiaries without increasing the value of the deceased’s estate for Inheritance Tax purposes.

However, where a pension scheme operates on a non-discretionary basis, for example, where the scheme rules require the benefits to be paid to a particular person nominated by the pension holder, the death benefits will generally be included within the deceased’s estate for Inheritance Tax purposes.

If the overall value of the estate exceeds the available Inheritance Tax thresholds, this may result in an Inheritance Tax liability.

From 6 April 2027, this distinction will largely disappear

Under the new rules, most unused pension funds and pension death benefits will be included within the value of the deceased’s estate for Inheritance Tax purposes, regardless of whether the pension scheme trustees or administrators have discretion over who receives the benefits.

This means that having a discretionary pension arrangement will no longer, in itself, provide the same protection from Inheritance Tax that it currently does.

There are, however, some exceptions, including qualifying death-in-service benefits payable through registered pension schemes and certain dependant’s pensions and annuities.

It is important to remember that the inclusion of pension benefits within an estate does not automatically mean that Inheritance Tax will be payable. The usual Inheritance Tax thresholds, exemptions and reliefs will continue to apply. For example, transfers to a surviving spouse or civil partner will generally remain exempt.

Will the changes affect your pension when you die?

Not necessarily. The impact of the new rules will depend on the type of pension you hold and whether any benefits are payable following your death.

Many traditional pension arrangements are designed to provide a retirement income rather than an investment fund that can be passed on to beneficiaries. For example, certain defined benefit pension schemes and annuity arrangements provide an income which may stop when the pension holder dies, although some may provide a continuing pension for a surviving spouse, civil partner or dependant.

If no unused pension fund or other relevant death benefit is payable following your death, there may be little or no impact from these changes.

However, other arrangements, particularly defined contribution pensions and personal pension plans, may contain unused funds which can be passed on to beneficiaries following the member’s death. These are the types of arrangements which may be affected by the new rules.

It is important not to assume that all your pension arrangements will be treated in the same way. Each scheme will have its own rules governing the payment of benefits on death, and the tax treatment will depend on the particular arrangements in place.

What should you do now?

With the changes due to take effect from 6 April 2027, now is a good time to review your existing pension arrangements and consider how they may affect your estate planning.

We would recommend contacting your pension providers to establish:

• Whether your pension provides any death benefits or unused funds which can be passed on to beneficiaries when you die.
• Whether the pension scheme trustees or administrators have discretion over who receives those benefits, or whether the scheme rules require payment to a particular nominated beneficiary.
• Whether any death benefits are payable as a continuing pension or annuity to a surviving spouse, civil partner or dependant.
• Whether your pension arrangements are likely to fall within the new Inheritance Tax rules from April 2027.

It is also worth reviewing any existing expression of wishes or beneficiary nomination forms held by your pension providers to ensure that they remain up to date and reflect your intentions.

How can we help?

The changes to the Inheritance Tax treatment of pensions are an important development in estate planning. For those with significant pension savings, they may mean that existing arrangements need to be reconsidered to ensure that their estate planning remains appropriate.

If you are concerned about how the new rules may affect you, you may contact Pinney Talfourd Wealth Management for advice on your pension arrangements and the potential impact of the changes on your wider estate planning. Taking advice now can help you understand your options so that you can make informed decisions about how your estate will be passed on to your loved ones.