UK Pensions

The landscape for pension inheritance is undergoing a significant shift.

Starting 6 April 2027, the UK government will bring most unused pension funds and pension death benefits into the scope of Inheritance Tax (IHT).  

This change is designed to stop pensions from being used primarily as wealth-transfer vehicles, realigning them with other assets for tax purposes.  

Key Points to Note

 Effective Date: This applies to deaths occurring on or after 6 April 2027. Deaths occurring before this date remain under the current rules.  

 What is Included: Most unused pension funds and death benefits—including those in "Flexi Access Drawdown" accounts—will now be counted as part of the deceased's estate.  

 What is Excluded:

 Death-in-service benefits paid from a registered pension scheme remain entirely excluded from IHT.  

 Bequeaths to a surviving spouse or civil partner remain exempt from IHT.  

 Bequeaths to registered charities continue to benefit from existing exemptions.  

 IHT Thresholds: The pension value will be added to the total value of the estate. If the combined value exceeds the current nil-rate band (typically £325,000, or up to £500,000 if passing a residence to direct descendants), the excess will be subject to IHT at 40%.  

 Administrative Responsibility: Personal Representatives (PRs) will be responsible for reporting and paying the IHT due on these pension assets. They will have the authority to issue "withholding notices" to pension scheme administrators, requiring them to hold up to 50% of the pension funds for up to 15 months to ensure the tax liability liabilities are able to be settled.  

Dual Taxation Risk

For beneficiaries who are not a spouse or civil partner, there is a potential for "double taxation" if the deceased dies after age 75. The pension could first be subject to 40% IHT as part of the estate, and the beneficiary could subsequently be subject to income tax on any withdrawals they make from that pension.  

Review Estate Planning: 

Clients with substantial pension pots should reassess their overall wealth strategy. The inclusion of pension assets may push estates over the IHT threshold that were previously exempt.  

 Charitable Giving: Reviewing whether to incorporate charitable legacies may be beneficial, as leaving 10% or more of the estate to charity can reduce the overall IHT rate from 40% to 36%. 

Just give us a call free on 0800 668 11 64 and make an appointment to discuss your circumstances and ensure you and your family are not caught out unexpectedly.