The flexibility can vary depending on your pension scheme, so it’s worth checking that your scheme can facilitate the options you want. If not, then you may want to consider a transfer to one that does. Whilst considering this, it is also worth reviewing your nominated beneficiaries to help ensure your pension is passed on to who you wish to receive it and avoid delays when distributing the funds.
In the Autumn Budget of 2024, the Government announced significant proposals to include most unused pension funds and death benefits within a deceased person’s estate for Inheritance Tax (IHT) purposes. After technical consultation, the government has decided to press ahead with these reforms, which are expected to come into effect from April 2027 despite ongoing concerns from industry experts. Draft legislation has been published, but this of course is subject to change.
Importantly, the spousal exemption can be used for any pension benefits left to a spouse or civil partner, in which case the benefits would not be liable to IHT on first death and can be taken immediately, however the benefits will enter the taxable estate of the spouse/civil partner. Other exemptions include any dependants’ scheme pension, death in service benefits payable from a registered pension scheme, benefits paid to charity and joint life annuities (though value protection and guarantee periods for annuities that have no discretion will continue to be liable to IHT).
There will be no allowance for business relief, which will disappoint those who speculated that holding business relief-qualifying assets, such as AIM portfolios, inside pensions could mitigate the liability after April 2027.
The standard rate of IHT is 40%. This is charged on your taxable estate in excess of the Nil Rate Band (NRB) currently £325,000 per individual, taxed at 0%, when left to non-exempt beneficiaries, though various exemptions, allowances and reliefs can affect the amount subject to IHT. From April 2027, the available NRB is expected to be apportioned between non-pension assets and each pension scheme paying benefits to non-exempt beneficiaries. The inclusion of pensions in the estate could mean the loss of the Residential Nil Rate Band (RNRB), which is tapered for net estates over £2m – increasing the tax exposure. The NRB and RNRB will remain frozen until 2030.
The deceased’s legal personal representatives (LPRs) are primarily responsible for reporting and paying any IHT due on unused pension funds or death benefits. This must be done before assets can be distributed to the beneficiaries. A joined-up approach between LPRs, beneficiaries and pension scheme administrators will be required, and ultimately it will be the beneficiaries who will decide whether IHT is paid from the pension. The extra regulatory burden necessitates additional administration and increased flow of information, which is not ideal for grieving families. Under current rules, you must pay IHT by the end of the sixth month after the person died, after which late interest penalties will accrue. It is easy to envisage delays and additional costs especially when multiple pensions are involved including discretionary pensions schemes, not to mention where there are illiquid assets, complicating an already complex process.
According to the latest update from July 2025: “HMRC will mitigate this impact by providing personal representatives, pension scheme administrators and beneficiaries with clear guidance, a calculator to advise whether Inheritance Tax is due, and a straightforward system to pay the tax liability.”
In terms of pension death benefits, the age at death affects the tax treatment of inherited pension assets. The proposals are that for deaths before age 75, there will continue to be no income tax, provided benefits are paid within two years of death and don’t exceed the individual’s remaining allowances if paid as a lump sum; however, there could be an IHT liability. There has been much talk around the potential double taxation of inherited pensions, given the current position whereby pension death benefits are subject to income tax when the member passes away after age 75. While not currently subject to change, if it was introduced it could mean that for deaths over 75, there may be both an IHT and income tax liability.
As things stand, IHT would be due first on the death benefits, with what is left over then subject to the beneficiary’s marginal rate of income tax if the original member was over 75 when they died. There are a few instances where tax can be reclaimed, such as if a pension beneficiary draws a taxable pension income to pay the IHT (rather than having the pension provider pay this directly from the pension fund), but you would expect this to be the exception rather than the norm.
Pensions operate on a principle known as ‘exempt-exempt-taxed’ where tax is exempt on pension contributions, exempt on investment returns and then taxed when taken in retirement. The government will argue that as a result of these changes the deceased member with an unused pension is merely passing on their “tax when taken” liability to the beneficiary. We are not aware of any consultation removing this EET principle on inherited pensions.
By the end of the decade, the Office for Budget Responsibility (OBR) forecasts that the proportion of deaths subject to IHT will rise from 5.2% in 2023/24 to 9.5% in 2029/30 4. It remains to be seen whether over time, in conjunction with other policy changes, this will result in the additional revenue the government aims to raise.
We are about to face a fundamental shift in retirement planning and estate planning, which requires us to rethink how we balance the two and what this means for our portfolios. Pensions remain attractive due to the tax relief on contributions in, however future planning is required more than ever, to ensure benefits are not heavily taxed when taken, or on death. It is likely that there will now be more of a focus on using pensions for their intended purpose of funding retirement, rather than purely as a tax-efficient vehicle for transferring wealth. There is no one-size-fits-all solution to the proposed changes, so personalised advice is key to ensure your plans remain effective.
Investment involves risk. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested.
The information provided in this document is of a general nature. It is not a substitute for specific advice with regard to your own circumstances.
Any views expressed are those of the author. All figures were correct at the time of going to print. You are recommended to obtain professional advice before you take any action or refrain from action. You should contact the person at JM Finn with whom you usually deal if you wish to discuss any of the topics mentioned.
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Pensions as a tax efficient vehicle for Inheritance Tax planning
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