Major changes to inheritance tax (IHT) rules coming into effect in April 2027 could push family IHT bills up by an average of £34,000. Under the new legislation, most unused pension funds and certain pension death benefits will, for the first time, be included in the deceased’s estate for IHT calculations.
This means that all unused pension pots, along with discretionary or non-discretionary pension death benefits, will be counted within the estate’s value. Notably, defined benefit schemes — such as final salary pensions — are generally excluded, as these benefits cannot ordinarily be passed on to heirs.
Maike Currie, Vice President of Personal Finance at PensionBee, warns that this will create an administrative challenge for personal representatives managing estates. “An admin nightmare is waiting in the wings for grieving families,” she said, describing personal representatives as needing to become “pension detectives” to locate old workplace pensions, historic funds, and online-only accounts, often complicated by missing documentation or lost passwords.
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Once the total estate value exceeds the IHT threshold, pensions will be subject to a 40% inheritance tax. Additionally, if the pension holder died after age 75, any remaining benefits drawn will be liable for income tax.
Ms. Currie advises individuals to update their expression of wish forms with all pension providers to ensure beneficiaries are clearly designated. She also offers some reassurance, noting that HMRC has confirmed that up to half of pension death benefits can often be paid out promptly while inheritance tax liabilities are settled.
The original plan was to make pension scheme administrators responsible for reporting and paying IHT on pension assets. However, PSAs raised concerns due to lack of access to broader estate information, contact details for executors or beneficiaries, and delays in death notifications.
With these reforms, Ms. Currie emphasizes, “Pension housekeeping is about to become essential estate planning,” urging people to take proactive steps to manage their pension affairs ahead of the changes.