Important changes to IHT on pension funds

On 21 July 2025, the government formally published its response to the consultation on inheritance tax (IHT) and pension assets. The key decision: from 6 April 2027, unused pensions and death benefits will be included in the value of a deceased person’s estate for IHT purposes. This decision represents a significant change in estate planning.

What’s more, personal representatives (typically executors) not pension scheme administrators will be responsible for managing and settling any IHT liabilities. The hope here is to streamline estate administration and reduce complications in pension fund processing.

The Key Takeaways:

• Effective date: These reforms will apply to deaths occurring on or after 6 April 2027.
• New IHT scope: Most unused pension funds and death benefits will now form part of a deceased’s estate for IHT purposes.
• Process responsibility shifted: Instead of pension scheme administrators (PSAs), personal representatives (PRs) will be responsible for reporting and paying IHT on pensions.
• Excluded benefits:
  
  • Death-in-service lump sums from registered pension schemes are excluded from IHT.
  • Dependants’ scheme pensions, such as Defined Benefit or Final Salary schemes, also remain exempt.
  • Standard spousal or civil partner exemptions continue, however we would recommend you read Richard’s article here for further details of how these changes impact couples.
  • Transfers to charities are also exempt.
  • Joint Life Annuities where the income continues will still be exempt.

How will the new legislation impact you?

If you currently hold pension savings, especially with dependants, such as children and cohabitees, it’s essential to review your estate planning. Previously tax-efficient strategies, such as leaving pensions untouched for heirs, may now generate substantial IHT liabilities.

For many individuals, pensions have been a highly efficient way to pass wealth to the next generation, but these reforms underline the importance of reviewing retirement and estate planning strategies well in advance. Ensuring that pension arrangements, death benefit nominations and wider estate plans are aligned will be essential to minimising potential IHT exposure.

Action points we recommend:

• Review your estate structure and pension beneficiaries.
• Consider strategies to mitigate tax exposure, such as trusts, IHT allowances, spousal exemptions and Whole of Life plans.
• Stay informed of forthcoming implementation details and guidance from HMRC.
• Arrange timely reviews.
• Gift accordingly on a regular basis.
• Consider consolidation of pension pots under one plan to make administration easier.

Reporting and payment process for Personal Representatives (PRs)

While the reform aims to enhance fairness in estate taxation, it also presents practical challenges for executors. Locating multiple pension accounts and calculating tax due in just six months can be daunting, especially under emotional strain, creating concerns around the added complexity and potential penalties. Here’s a quick overview of how the process will now work:

1. PSA notification: Once notified of a death, the pension scheme will inform the PR of the value of unused pension funds or death benefits within four weeks  .
2. PRs actions:
   
   • The PR assesses the entire estate to determine IHT liability.
   • PRs make the IHT payment—either from existing funds (“free estate”) or via directions from beneficiaries.

3. Payment options:
   
   • PRs can pay the IHT themselves from estate assets, reclaiming funds later where applicable.
   • Beneficiaries can direct the PSA to pay the IHT on their behalf.
   • Beneficiaries may pay the IHT directly and claim refunds for any Income Tax incurred on the funds used to pay IHT.

Why were these changes made?

The PSA-led model was withdrawn due to concerns about practical inefficiencies, administrative delays, payment-on-account issues and the lack of surplus estate funds. The changes aim to remove pension schemes being used as vehicles for tax-efficient wealth transfer, urge consistency and better align with the intended use of pensions, namely for funding your retirement. 

The shift of reporting and payment responsibility to personal representatives should simplify processes for pension providers. But it also means that executors will need to be more proactive in identifying all pension assets quickly to avoid penalties.

As the rules evolve, careful planning and timely advice will be key to protecting your legacy and providing peace of mind for your loved ones. If you have questions about how these changes might affect you or your family, please do get in touch with us to discuss your concerns.