Pension funds and death benefits will soon be pulled into the scope of IHT. Nina Cherry, wealth consultant at Simplify Consulting, explains what this means for providers and advisers.
From 6 April 2027, most unused pension funds and death benefits will be pulled into the scope of inheritance tax (IHT) purposes. This means that the total value of the estate – including pensions – in excess of £325,000 (or up to £500,000 with the residence nil-rate band), will be taxed at 40%. The government’s rationale? To stop pensions from being used as intergenerational wealth transfer tools and realign them more closely with their original purpose i.e. retirement funding.
This is a seismic shift. Today, most unused pension pots and death benefits sit outside the estate for IHT and can usually be passed on tax-free.
In reality, HM Revenue & Customs (HMRC) estimate that less than 5% of inheritable estates will be affected in the first year, with the average additional liability being £34,000, and a further 38,500 estates potentially having to pay more tax than before. Additionally, it is important for members to understand that death in service benefits and payments to spouses, civil partners, or charities will remain exempt.
“Most estates will continue to have no Inheritance Tax liability after 6 April 2027.”
However, this is already presenting significant advisory challenges well before the April 2027 deadline, as clients seek advice on how to mitigate against this change and manage their succession planning; and advisers are bracing themselves for more to come. They are expecting around two thirds of clients to be affected, with 77% of advisers expecting significant increases in workloads, and roughly 40% of clients requiring plan reviews.
But it is not just advisers who will face an increase in demand because of the impending changes. So, what should pension providers expect and how can they prepare?
Clients are already asking tough questions: Should they stop contributions? Draw down early? Use trusts or gifting strategies?
Providers must be ready to support members and their representatives through this transition.
Implications for pension providers
Providers and administrators will need to:
- Protect members from making potentially harmful decisions. Almost half (48%) of advisers have had clients asking whether they should reduce or stop pension contributions considering the upcoming changes – indicating that the change has the potential for damaging consequences if it discourages members from saving into their pensions. Providers have a role to play here and should not remain silent. They should consider their obligations under Consumer Duty to enable and support customers to pursue financial objectives and use targeted support and service messages to help mitigate against potentially harmful decisions.
- Support personal representatives (PRs). PRs (not pension administrators) will be responsible for calculating, reporting, and paying the tax. Whilst this simplifies admin for providers when compared to the original proposals, they should support PRs (who may also be the bereaved beneficiaries) to navigate this. This should include finding out from the PR whether the deceased had a spouse or civil partner and telling them how the pension benefits will be split between exempt and non-exempt beneficiaries, to help them work out the IHT liability.
- Implement processes and systems for the new Pension Inheritance Tax Payments Scheme, enabling withholding of up to 50% of benefits for 15 months if requested. Beneficiaries who are receiving benefits subject to IHT will have the right to request that this is paid directly to HMRC via the provider (this would also make it an authorised payment and therefore not subject to Income Tax).
- Consider training needs for staff and trustees regarding the new rules. This should cover engagement, guidance, and support for both members and PRs.
- Update internal processes and enhance systems to manage new timelines, withholding requests, and beneficiary communications.
Communication responsibilities
Transparency is key. Start updating member communications now, with resources including guides, FAQs and letters, to clearly explain the upcoming changes. This should include guidance on how nominations affect IHT liability, options for reducing exposure (such as drawdown strategies), exempt vs non-exempt beneficiaries and benefits (such as death in service benefits paid from a pension), and implications for non-exempt beneficiaries – explaining that IHT may be due, who is responsible for paying and that there may be the option for it to be paid directly via the provider (net of income tax).
Scheme members should be encouraged to review and update nominations; although an Expression of Wish will not prevent IHT, it still matters for who gets the money, and a lack of one could delay payment and complicate probate. Consider drawing down funds earlier if appropriate and seek financial advice on estate planning and alternative strategies such as trusts and gifting.
Providers could also consider offering educational resources and webinars to help members understand the implications.
Time to act
The April 2027 IHT changes are more than a tax tweak; they are a fundamental shift in pensions administration.
Providers that prepare now will protect compliance, support their members in navigating these changes – maintaining confidence and strengthening trust during a period of uncertainty – and reduce distress, confusion and delays for bereaved families.
About the author
Nina Cherry is a wealth consultant at Simplify Consulting and has 25 years of experience in financial services. She partners with clients across the wealth, life and pensions sectors to deliver transformational change, navigate complex regulatory landscapes, and drive operational excellence.
