In her Autumn 2024 Statement the Chancellor announced a tectonic shift in pensions taxation. Unused retirement pension funds, when paid as death benefits, will be included in the value of a deceased person’s estate for inheritance tax (IHT) purposes from 6 April 2027.
This move targets a recent trend of using pensions as tax-planning vehicles for inter-generational private wealth transfer, and for some the immediate focus now will be on raking through the ashes to free up investment savings that are seen to be "trapped" in pension schemes. For many, though, as the almost complete reversal of a policy of some 60 years' standing, this change will trigger a more fundamental rethink of their objectives in saving for retirement altogether, and how these can best be achieved.
For permanent residents of the pensions space, therefore, there is interesting work to be done in devising tax-efficient products and structures for retirement and death benefits in the future. But there is also the slightly more immediate and grim business of figuring out how best to collect the tax before a fast-approaching deadline of 6 April 2027.
The Consultation
Neatly side-stepping the merits of a decision that had already been taken, HMRC ran a "technical consultation" on the processes required to implement these changes, which ran by from 30 October to 22 January 2025. The proposal then was that pension scheme administrators, rather than personal representatives, should be responsible for the payment of any IHT due on the pension component of a deceased’s estate.
The rationale was a sensible one, in itself, of "following the money" to help avoid situations where personal representatives might struggle to access sufficient funds within the deceased’s estate to settle the IHT bill within the necessary 6 months of a death to avoid paying interest.
It soon became clear, though that this would introduce significantly greater problems than having to pay interest. Questions and concerns emerged as to whether this change was appropriate or even practical, given that pension scheme administrators would not typically have the necessary access or information to manage such responsibilities.
The Response
The Government has now published a response document to the consultation alongside draft legislation to be included in the Finance Bill 2025-2026 and a policy paper.
Surprisingly to many, the Government has clearly listened to concerns across the industry, stating that “although some of these concerns were known at the time of the announcement, the scale of the impact on pension scheme administrators and pension beneficiaries became fully apparent during the consultation process”.
Scheme and Estate Administration
The practicalities for scheme administrators are significantly better than many will have expected, however, the same cannot be said for surviving beneficiaries, particularly those not having the benefit of any spousal exemption. They will most likely face additional responsibilities and challenges when dealing with the administration of the estate, particularly around the complexities of IHT on pensions and as it stands there is little clarity or guidance available to help them navigate the practicalities.
However, HMRC has announced a commitment to industry discussions to help develop and refine the personal representative-led process, with further guidance tools and process maps to support dependants to be expected ahead of implementation in April 2027.
Death in Service Benefits and Scheme Pension Exemptions
Clarification has also been provided in respect of the scope of the benefits potentially charged to IHT. Respondents highlighted that the initial approach would create inconsistencies between registered and non-registered death-in-service benefits. Any shift in the private sector to other forms of death benefit (for example Excepted Group Life) could not easily have been mirrored in the public sector and so, under the draft legislation, death-in-service lump sum benefits from occupational schemes are now exempt – carefully scoped, though, to exclude returns of retirement funds.
As before, scheme pensions (i.e. defined benefit dependants' pensions) are exempt, so that the benefits exempted closely match the main death benefits paid out by defined benefit schemes and, in particular those in the public sector.
Conclusion
Overall, these reforms seek to rebalance the role of pensions in the UK, shifting the focus away from their use tax-efficient vehicles for wealth transfer, and back to their core purpose of funding retirement. If or when new and more efficient retirement and death benefit products emerge that are better-aligned to the new space, we can expect that it will be through focusing on these core values that they succeed. Whether we ever see retirement products again that don't pay out on death (a staple of the personal pension industry until the late 1980s) must, however, be anybody's guess!
So it will be interesting to see how these reforms play out in practice. However, what’s clear is that the conversation is far from over. Notably, the Government is actively seeking feedback on the draft legislation, with comments invited by 5 September 2025
IHT planning and tailored legal advice are potentially crucial to anyone that affected by the issues explored in this blog. If you would like to discuss any of the issues raised in this blog, please contact a member of the pensions team or your usual Brodies contact.
