From April 2027, most unused pension funds and pension death benefits will be included in a person's estate for inheritance tax (IHT), even if scheme administrators or trustees have discretion over payments. This is a major change, where currently pension assets remain protected from IHT and involve minimal administration.
Key exceptions
As detailed in our September issue, death in service benefits from both discretionary and non-discretionary registered pension schemes will remain exempt from IHT.
What to consider
Review your beneficiary nomination: Pension death benefits do not automatically follow your Will or intestacy rules. They are usually held in trust and paid at the trustees' discretion, but you can express who you would like to benefit through a nomination. With IHT exemptions now generally limited to spouses, civil partners, and charities, it is crucial to review your nominations alongside your succession planning.
Review your Will: The changes require the nil rate band (the sum you can leave free of IHT, currently £325,000) to be apportioned across the assets in your estate and your pension assets. Any legacies should be considered with this in mind going forward.
Review your pensions: Multiple pension pots are likely to add complexity. The changes introduce a significant additional layer of administration for your executors and the pension scheme trustees. There is a limited window during the administration of your estate to co-ordinate the information, calculate and pay the IHT. This will delay funds being paid from the fund to your intended beneficiaries. Despite the most recent guidance that provides a mechanism for partial payment of the pension fund during the early stages of an administration, we anticipate pension scheme trustees will be cautious about paying significant funds too quickly, until sufficient tax has been paid to avoid the associated risks.
Review your liquidity: Under the new rules, pension funds can only be used to settle the IHT due directly to HMRC on those specific funds. Therefore, if you had hoped the pension would provide some swift liquidity to help with costs whilst your assets are frozen during the administration, the position should be reviewed.
Key points
- Most pension assets will soon be subject to IHT.
- Death in service benefits and payments to spouses, civil partners, or charities remain exempt.
- Estate administration will become more complex and costly.
- Now is the time to review your estate planning and understand how these changes could affect your legacy.