Inheritance tax changes could increase bills by £34,000 as pensions are dragged into estates. Families are being warned they could face inheritance tax bills averaging an extra £34,000 under major pension rule changes due to take effect from April 2027.
The reforms will see most unused pension funds and certain pension death benefits included within estate calculations for inheritance tax purposes for the first time. All unused pension funds and pension death benefits regardless of discretionary or non-discretionary payments will be included within the deceased's estate. Defined benefit pensions, such as final salary pensions should not be affected as these can't usually be passed on.
Concerns from Experts
Maike Currie, vice president of personal finance at PensionBee, said: "An admin nightmare is waiting in the wings for grieving families." Ms Currie said personal representatives handling estates would effectively need to become "pension detectives" under the new system. She explained that relatives and executors could be "expected to track down old workplace schemes, historic pension pots and online-only accounts, often with incomplete records and missing passwords."
Tax Implications
Where the total size of the estate is over the IHT threshold, pensions will be liable for 40% IHT followed by an Income tax bill for drawing the remaining benefits if the original pension holder died after the age of 75. Ms Currie said: "One simple but important thing people can do now is ensure their expression of wish forms detailing their beneficiaries are up to date with all pension providers."
She added: "There is a bit of good news for bereaved families with HMRC confirming that, in most cases, up to half of pension death benefits should still be able to be paid out relatively quickly while inheritance tax liabilities are being settled."
Administrative Challenges
Initially it was intended that pension scheme administrators (PSAs) rather than personal representatives (PRs) would become liable for the reporting and payment of any Inheritance Tax on the pension component of an estate. However, PSAs raised significant practical concerns, including that they would have no visibility of the estate's wider assets and liabilities, would not hold contact details for PRs or beneficiaries, and might not be notified of a member's death for several months.
Ms Currie concluded: "Pension housekeeping is about to become essential estate planning."
