Upcoming changes to inheritance tax on unused pension funds and death benefits: What you need to know

In response to the Autumn Budget 2024, the Government has released its draft legislation outlining how unused pension funds and pension-related death benefits will be treated for inheritance tax (IHT) purposes.

These changes, set to take effect from April 2027, could have significant implications for retirement and estate planning. 

Key proposals

Under the new rules: 

• All unused pension funds and death benefits will be treated as part of an individual’s estate for IHT purposes, regardless of whether the pension scheme trustees have discretion over the distribution of those benefits. 
• Spousal and civil partner and registered charities exemptions will remain in place. 
• Death in service benefits will be excluded from IHT, whether the scheme is discretionary or not. 
• Dependant’s scheme pensions from defined benefits schemes/collective money purchase schemes are also excluded 
• Small scheme pensions commuted to a lump sum will be excluded 
• Dependant/beneficiary annuity payments will be excluded (however guaranteed payments and value protection paid during an annuity guarantee period, will be included in an estate) 
• Business and agricultural assets held in pensions will not qualify for Business Relief or Agricultural Relief. 

Reporting responsibilities

Following consultation, HMRC has clarified that it will be the personal representatives of the deceased, rather than the pension scheme administrators who will be responsible for reporting and paying any inheritance tax due on pension benefits. However, PRs will need to work closely with scheme administrators to gather accurate valuations and calculate any tax owed.

HMRC has issued further guidance to help PRs, scheme administrators, and beneficiaries understand the reporting process and how the IHT liability can be met.

Options for paying the tax

Three main routes have been outlined for settling the IHT bill: 

• Payment from the deceased’s estate – If sufficient funds are available, the IHT can be paid directly from the estate. 
• Payment by the pension scheme administrator – Beneficiaries may instruct the scheme to pay HMRC directly. 
• Payment by beneficiaries – Beneficiaries can withdraw the funds, pay IHT themselves, and reclaim any income tax incurred on the IHT-related portion. 

While the legislation remains in draft form open for technical consultation until 15 September 2025, the direction of travel is now clearer. These proposed changes signal a shift in how pensions may be used as part of an estate planning strategy.

Rethinking pension and estate planning

The long-standing connection between retirement income and inheritance tax planning is evolving.

In the face of these changes, individuals may wish to: 

• Explore the affordability and timing of lifetime gifts 
• Consider intergenerational transfers as part of broader wealth planning 
• Evaluate life insurance as a potential solution to meet future IHT liabilities 

With these new rules on the horizon, now is a crucial time to review your financial plans and ensure they remain fit for purpose. If you would like any help with this, please do get in touch.

The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice. References to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of publication. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments. You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation. 

Kreston Reeves Financial Planning Services Limited is an appointed representative of Craven Street Financial Planning Limited (Registered in England and Wales: 03852054. Authorised and regulated by the Financial Conduct Authority: 135202). Kreston Reeves Financial Planning Services Limited is registered in England and Wales with registered number 13241966. Registered office: 37 St Margaret’s Street, Canterbury, Kent CT1 2TU. 

The FCA does not regulate tax advice.