From 6 April 2027, the way pensions are treated for Inheritance Tax will change significantly.
Most unused pension funds and pension death benefits will be included within the value of a deceased person’s estate. This could result in more estates becoming liable for IHT and considerably more work for executors, particularly where someone has several pensions.
The changes also make it important for individuals to review their Will, consider whether their chosen executors are suitable and ensure their pension information and beneficiary nominations are up to date.
Pension IHT Changes 2027: What Is Changing?
The new rules will apply where a pension scheme member dies on or after 6 April 2027. If they die before that date, the current rules will continue to apply, even if pension benefits are paid after 6 April 2027.
Under the current system, many discretionary pension death benefits can sit outside a deceased person’s estate. From April 2027, trustee discretion will no longer determine whether those assets fall within the scope of IHT. Most unused pension funds and death benefits will instead be included when calculating the estate’s value.
There are exceptions. Qualifying death-in-service benefits and qualifying dependants’ scheme pensions will remain outside the new rules. Existing IHT exemptions can also continue to apply where pension benefits pass to an exempt beneficiary, such as a qualifying spouse or civil partner.
Personal representatives will be responsible for reporting the relevant pension value and paying any IHT due. Once pension benefits have vested in a beneficiary, that beneficiary can also become jointly and severally liable for the IHT attributable to those benefits.
Executors will not necessarily control the pension funds. Scheme trustees may still decide who receives discretionary death benefits, while executors deal with the related tax and work with providers, administrators and beneficiaries during the estate administration.
Why Will the Changes Create More Work for Executors?
Administering an estate already involves identifying assets, obtaining valuations, dealing with HMRC and settling liabilities. From April 2027, pensions will add another layer.
HMRC expects personal representatives to take reasonable steps to identify pension schemes from which death benefits may be payable. This could involve reviewing paperwork, financial records and bank accounts, as well as speaking with family members, advisers and other relevant contacts.
Once the pensions have been identified, each relevant provider will need to be contacted for information about the pension’s value and, where required, how the benefits are divided between exempt and non-exempt beneficiaries.
Multiple and Forgotten Pension Pots
The additional work could be particularly noticeable where the deceased changed employers several times and accumulated multiple workplace and personal pensions.
Rather than obtaining one valuation, an executor could find themselves dealing with several providers, each with its own processes and timescales.
Under the draft information-sharing regulations, scheme administrators will generally be expected to provide a valuation within 28 days of receiving a request. Where only an estimate can initially be provided, the final value should be supplied within 14 days of it becoming available.
If an old pension is discovered after the estate has been reported, the executor must obtain the relevant information and may need to correct the IHT account. A certificate of discharge may protect the personal representatives from further liability, but the pension must still be reported and a beneficiary can remain liable for related IHT.
Pension Information Will Need to Be Gathered Early
Inheritance Tax is normally due by the end of the sixth month after the month in which the person died. From April 2027, this deadline will also apply to IHT attributable to relevant pension assets, and interest can apply where tax is paid late.
Personal representatives must also deal with the relevant Inheritance Tax requirements before applying for probate. Pension enquiries will therefore need to begin early, particularly where the estate could fall within the scope of IHT.
The new framework includes measures intended to help where the executor is responsible for tax on funds still held by a pension scheme.
A personal representative who knows or reasonably believes IHT may be due will be able to issue a notice requiring a registered pension scheme to withhold up to 50% of a beneficiary’s relevant entitlement temporarily. HMRC says this should not be used routinely or simply as a precaution. The notice will remain effective until it is withdrawn, the relevant tax is paid or 15 months have passed from the end of the month in which the death occurred.
The Pensions Direct Payment Scheme will also allow a valid notice to be issued requiring a registered pension scheme administrator to pay the relevant IHT and interest directly to HMRC from pension funds that have not yet been distributed.
What Should You Review Before April 2027?
The changes provide a useful opportunity to review your estate planning before April 2027.
Start by checking that your Will remains up to date and that the executors you have appointed are still the right people for the role. Administering an estate involving several pensions and a potential IHT liability could require them to deal with multiple providers, valuations, HMRC reporting and tax payments.
It is worth considering whether your chosen executors will have the time and confidence to manage these responsibilities, or whether professional support may be appropriate.
You should also review your pension arrangements. Keep an accurate record of your pension providers, scheme or policy details and relevant contact information, and make sure your executors will be able to locate it when needed.
Any expression of wishes or beneficiary nominations held by your pension providers should be checked regularly to ensure they continue to reflect your circumstances and intentions. As a Will does not usually determine how discretionary pension benefits are distributed, your Will and pension arrangements should be reviewed together as part of your wider planning.
With more unused pension wealth potentially falling within the scope of Inheritance Tax, reviewing your likely exposure in advance can help identify whether further planning or professional advice may be needed.
What Will Executors Need to Do?
For deaths occurring from April 2027 onwards, executors may need to:
- identify all relevant pension arrangements
- contact each pension provider and obtain date-of-death valuations
- establish whether benefits pass to exempt or non-exempt beneficiaries
- include relevant pension values in the estate’s IHT calculation
- keep track of estimated and final valuations
- consider how any pension-related IHT will be funded
- update HMRC if a value changes or another pension is discovered
The number of pensions involved, their value and the beneficiaries receiving them will all affect how complicated the administration becomes.
How SMH Wills & Probate Can Help
Acting as an executor carries significant responsibility, and the pension IHT changes could make administering some estates more complex.
At SMH Wills & Probate, our team can support executors throughout the probate and estate administration process. We can also help you review your Will and wider estate planning ahead of the April 2027 changes.
If you are responsible for administering an estate, or would like advice on how the changes could affect your plans, speak to the SMH Wills & Probate team.
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