Inheritance Tax on Unused Pension Funds and Death Benefits - Diving Deep

Exemptions & Existing Reliefs

• Transfers to a spouse, civil partner, or registered charity remain exempt from IHT.

• Death-in-service lump sums payable from registered pension schemes are specifically excluded from IHT treatment, along with dependants’ annuities and joint life annuities.

Who Pays & Reports the Tax

• Responsibility lies with personal representatives (executors), not pension scheme administrators (PSAs). PSAs must, within four weeks of notification, provide valuations and beneficiary details to PRs.

• Beneficiaries may request or require the PSA to pay IHT directly from the pension in some cases; otherwise, PRs must report and pay within six months of death to avoid penalties.

Scale & Financial Impact

• HMRC estimates 213,000 estates with inheritable pension assets in 2027–28; of these:

  • ~ 10,500 estates will incur IHT where previously they would not.

  • ~ 38,500 estates will pay higher IHT, with an average extra liability of about £34,000.

• The measure is projected to generate £640m in 2027/28, rising to £1.46bn by 2029/30.

Unbiased Analysis – Pros & Cons

Government rationale

• Aims to close a perceived tax loophole enabling pensions to function as tax-free inheritance vehicles.

• Seeks to create consistency in IHT treatment across asset types and scheme types.

Criticisms & Concerns

• Executors and bereaved families may bear significant administrative burdens: tracking down multiple pension accounts, coordinating providers and trustees, meeting tight deadlines, and managing penalties if delayed.

• Self-invested pensions holding illiquid assets (e.g., property or business interests) could force fire-sales of assets to meet IHT obligations within the payment window.

• Unmarried partners face disadvantages: only transfers to spouses/civil partners remain exempt, so cohabitants may face unexpected IHT liabilities.

What Should Individuals & Executors Do Now?

For Individuals (Estate‑planning perspective)

• Re-evaluate whether to draw down pension funds earlier, or use them to make lifetime gifts within annual allowances.

• Consider purchasing an annuity to convert pension for retirement income.

• Ensure expression of wish forms are up to date, particularly to favour spouses/civil partners and reduce exposure of other beneficiaries subject to IHT.

For Personal Representatives & Executors

• Start locating all pension arrangements and notifying scheme administrators promptly upon death.

• Keep records and prepare for IHT400 planning, especially where pension assets push estates over thresholds.

• Be aware of the six‑month deadline for IHT payment; familiarise yourself with HMRC’s upcoming guidance, calculator, and payment scheme.

For Pension Scheme Administrators

• Must develop systems for providing valuations within four weeks, and participating in the Pension IHT Payment Scheme.

• Communicate clearly with PRs and beneficiaries about the possible IHT implications and deadlines

In Summary

• Effective 6 April 2027, under the current reform plan, unused pension assets and most death benefits will count within estates for IHT.

• Personal representatives carry reporting and payment responsibilities; spouses/civil partners and charities remain exempt, as do death-in-service benefits.

• Estimated to raise up to £1.46 billion a year from about 10,500 to 38,500 estates facing new or higher IHT liabilities.

• While the measure aims to align pension inheritance with the broader IHT regime and curb tax avoidance, it raises concerns about administrative burden, timing pressures, and impact on family-owned businesses and unmarried partners.

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Disclaimer:
This content is based on our understanding of the proposed rules at the time of writing. It is provided for general information only and does not constitute legal, tax, or financial advice. You should seek independent professional advice before taking any action. We accept no liability for any decisions made based on this information.