The UK Government has announced proposed reforms to the way unused pension funds and certain pension death benefits are treated for inheritance tax (IHT). If implemented as planned, the changes are expected to apply to deaths occurring on or after 6 April 2027.
For many years pensions have often fallen outside the value of a person’s estate for inheritance tax purposes. As a result, pensions have frequently been used as an effective estate planning tool, allowing individuals to pass pension savings to family members in a tax-efficient way.
However, the Government has proposed bringing most unused pension funds and certain death benefits within the scope of inheritance tax, which could significantly affect how estates are administered after death.
While the policy intention is to ensure pensions are primarily used to provide income during retirement rather than as a tax-efficient inheritance vehicle, legal professionals have raised concerns about the practical implications for executors, personal representatives and beneficiaries.
In this guide we explain:
- how inheritance tax currently applies to pensions
- what the proposed 2027 inheritance tax pension reforms may involve
- why executors may face additional responsibilities
- how the changes could affect probate and estate administration
- when families should consider seeking advice from probate solicitors
How Inheritance Tax Works in the UK
Inheritance Tax is charged on the value of a person’s estate when they die.
The estate typically includes assets such as:
- property or land
- savings and bank accounts
- investments and shares
- business interests
- personal possessions
Inheritance tax is generally charged at 40% on the value of the estate above the available tax-free allowances.
Current Inheritance Tax Thresholds
As of 2026 the main inheritance tax allowances are:
- Nil Rate Band
£325,000 – the amount of the estate that can be passed on free of inheritance tax. - Residence Nil Rate Band
£175,000 – an additional allowance available when a main residence is left to a direct descendant such as a child or grandchild.
In certain circumstances married couples or civil partners may pass on up to £1 million free of inheritance tax by combining allowances.
These thresholds are currently frozen until April 2030 under existing government policy.
Why Pensions Have Often Fallen Outside the Estate
Many pension arrangements are structured so that pension trustees or scheme administrators have discretion over who receives the death benefits.
Because of this discretionary structure, pension funds have often not formed part of the deceased person’s estate for inheritance tax purposes.
Instead, the pension provider typically distributes death benefits directly to nominated beneficiaries.
This means pension funds have often been able to pass to family members without forming part of the estate subject to inheritance tax.
However, the position is not identical for every pension arrangement and can depend on the specific rules of the pension scheme.
The Proposed Inheritance Tax Changes for Pensions (Expected 2027)
The Government announced in the Autumn Budget 2024 that it intends to bring most unused pension funds and certain pension death benefits within the value of a person’s estate for inheritance tax purposes.
The proposed changes are expected to apply to deaths occurring on or after 6 April 2027, although the final legislation may still evolve before implementation.
If the reforms proceed as currently proposed, the value of unused pension funds may need to be considered when calculating the total value of a person’s estate for inheritance tax purposes.
However, the rules are expected to contain specific exclusions, including certain types of pension benefits such as:
- death-in-service benefits
- certain dependant’s pensions
- specific defined benefit arrangements
The precise scope of the changes will depend on the final legislation.
How the Proposed Changes Could Affect Probate
If pension funds must be taken into account when calculating inheritance tax liabilities, the role of executors and personal representatives may become more complex.
Executors are responsible for administering the estate and ensuring that inheritance tax is correctly reported and paid.
This typically involves:
- identifying all assets of the deceased
- obtaining valuations
- submitting inheritance tax returns to HM Revenue & Customs
- paying inheritance tax before distributing the estate
If pension funds form part of the inheritance tax calculation, executors may need to obtain additional information from pension providers when administering the estate.
Locating Pension Assets
Modern working patterns mean many individuals accumulate multiple pension pots over their lifetime.
An executor may therefore need to:
- identify each pension scheme
- contact pension providers
- obtain valuations of unused pension funds
- understand the relevant scheme rules
This could increase the administrative work involved in estate administration and probate.
Payment of Pension Death Benefits
One of the practical issues raised by legal commentators concerns the timing of pension payments to beneficiaries.
Pension providers often pay death benefits directly to nominated beneficiaries rather than through the estate.
If pension values are relevant when calculating inheritance tax liabilities, there may be situations where beneficiaries receive pension funds before inheritance tax has been fully assessed.
To address this issue, the proposed legislation includes mechanisms that may allow personal representatives to request that pension scheme administrators temporarily withhold part of a pension death benefit in order to ensure any inheritance tax liability can be settled.
The details of these mechanisms will depend on the final statutory provisions.
Responsibilities and Risks for Executors
Executors have a legal duty to ensure that inheritance tax is paid correctly before distributing the estate.
If errors occur, executors may in some circumstances become personally liable for unpaid inheritance tax.
Where pension funds form part of the inheritance tax calculation, executors may need to work closely with pension providers and professional advisers to ensure that the estate is administered correctly.
Given the potential complexity of the proposed reforms, many executors may wish to seek professional legal advice.
Potential Impact on Families and Beneficiaries
The proposed reforms may also affect how different beneficiaries are treated.
In some estates:
- pension benefits may pass to one group of beneficiaries
- other assets (such as property) may pass to different beneficiaries
If pension funds are taken into account when calculating inheritance tax, questions may arise regarding how tax liabilities are ultimately borne between beneficiaries.
These situations may occasionally lead to disagreements between family members.
Clear estate planning and professional advice can help reduce the risk of such disputes.
What Happens if Someone Dies Without a Will?
If a person dies without leaving a valid Will, their estate is distributed under the rules of intestacy.
In these circumstances:
- an administrator must apply to the Probate Registry for Letters of Administration
- the estate is distributed according to statutory rules
- family members may have differing expectations about inheritance
Where estates include multiple pension arrangements and potential inheritance tax liabilities, the administration process may become more complex.
Preparing a valid Will can help simplify estate administration and ensure that your wishes are carried out.
Why Probate Solicitors Can Help
Administering an estate can be a complex process, particularly where inheritance tax issues arise.
A solicitor experienced in probate and estate administration can assist executors and families with:
- identifying estate assets
- contacting pension providers
- calculating inheritance tax liabilities
- preparing inheritance tax returns
- applying for the Grant of Probate
- distributing estate assets correctly
Professional legal advice can help ensure the estate is administered efficiently and in accordance with the law.
Steps You Can Take Now
Although the proposed pension inheritance tax changes are not expected to apply until April 2027, it may be sensible to review your estate planning arrangements.
Review Your Will
Ensure your Will reflects your current wishes and appoints appropriate executors.
Check Pension Nomination Forms
Most pension schemes allow members to complete an expression of wish form indicating who should receive death benefits.
These forms should be kept up to date.
Consider Estate Planning Advice
A solicitor or financial adviser can review your estate planning arrangements and advise on potential tax implications.
Keep Records of Pension Providers
Maintaining clear records of pension arrangements can help executors identify assets more easily after death.
Don’t Let Inheritance Tax Catch You Off Guard
Inheritance tax rules and pension changes can be complex—but the right advice makes all the difference.
Frequently Asked Questions
1. Will pensions definitely be subject to inheritance tax from 2027?
The Government has proposed reforms that would bring most unused pension funds and certain death benefits into inheritance tax calculations from 6 April 2027, although the final legislation is still subject to parliamentary approval.
2. Who pays inheritance tax after death?
Inheritance tax is usually paid by the executor or personal representative before the estate is distributed.
3. Do pension beneficiaries always pay inheritance tax?
Not necessarily. The tax treatment will depend on the final legislation and the circumstances of the estate.
4. Do I need probate if someone had a pension?
Probate may still be required if the deceased owned property, savings or other assets in their sole name.
Conclusion
The Government’s proposed reforms to the inheritance tax treatment of pensions represent a significant development in UK estate planning.
If implemented, the changes could affect how estates are valued and administered, potentially increasing the responsibilities of executors and personal representatives.
Families dealing with probate may therefore benefit from professional advice to ensure inheritance tax obligations are correctly handled.
If you require assistance with probate, estate administration or inheritance tax planning, speaking to a solicitor experienced in these areas can help ensure the process is managed efficiently and in accordance with the law.
Disclaimer: This article is provided for general information purposes only and does not constitute legal advice. The law relating to inheritance tax and pensions may change and individual circumstances will vary. Specific legal advice should be obtained from a qualified solicitor.