Update: Inheritance Tax on Pensions – April 2027 Reform Confirmed

Friday 25 July, 2025

In our previous article, Understanding Investments – Pension Taxes on Death, we discussed the government’s proposed changes to the way Inheritance Tax (IHT) would be applied to pensions. Following consultation, HMRC has now confirmed that these changes have moved a step closer to coming into force from 6 April 2027.

This update outlines the finalised policy, explains who will be affected, and provides clarity on how pension assets will be valued and taxed under the new rules.

These changes represent one of the most significant developments in estate planning in recent years. They introduce a more consistent approach to IHT on pension wealth while also shifting responsibilities for tax payment and reporting.

What Is IHT on Pensions and Why Is It Changing?

Inheritance Tax is generally charged at 40% on the value of an estate above the applicable nil-rate band. Traditionally, pensions have fallen outside of this calculation, particularly where unused funds remain within a defined contribution scheme at the time of death.

The government has now confirmed that most unused pension funds and death benefits will be included within the taxable estate from April 2027. This change aims to ensure a more consistent tax treatment of death benefits, reduce avoidance, and bring pension assets into alignment with the broader IHT regime.

How Will IHT Apply to Pensions from 2027?

From 6 April 2027, unused pension funds and most lump sum death benefits will be treated as part of the deceased’s estate for IHT purposes. If the total estate value, including pensions, exceeds the nil-rate band (£325,000 for individuals or up to £1 million for a couple including the residence nil-rate band), IHT may be payable at 40%.

It is important to note that only around 10,500 estates annually are expected to incur additional tax solely due to the inclusion of pension assets, according to HMRC’s impact analysis. However, a larger number, up to 38,500, may see higher IHT liabilities than under the current regime.

Key Update: Personal Representatives (PRs) Will Handle Reporting and Payment

A significant point of discussion during the consultation was whether Pension Scheme Administrators (PSAs) should be made responsible for paying IHT on pension assets.

Following strong feedback from industry and professional bodies, the government has decided that this responsibility will remain with the Personal Representatives of the estate (i.e. executors or administrators).

PSAs will, however, still be responsible for valuing the pension assets and providing that information to PRs within four weeks of notification of death. This allows PRs to carry out a full IHT calculation across the estate.

How Pension Assets Will Be Valued

Valuation of pension assets will be based on the fund value or the payable death benefit as at the date of death. PSAs will provide this valuation to PRs, who must then incorporate it into the total estate calculation.

Where a liability arises, there will be flexibility in payment options:

PRs may pay from the main estate.
Beneficiaries may ask the PSA to settle the IHT from the pension pot (subject to scheme rules).
Beneficiaries may also pay the tax directly and reclaim any Income Tax overpaid.

This multi-channel approach is designed to reduce delays in distributing death benefits and offer flexibility in how tax liabilities are managed.

Exclusions: What Remains Outside of Scope

The government has confirmed that death in service benefits and joint-life annuities will remain outside the IHT regime, provided they are paid from a registered pension scheme. This decision removes an inconsistency where equivalent benefits paid through non-pension arrangements were already exempt.

The exclusion ensures that employer-sponsored death in service schemes remain a tax-efficient employee benefit and removes the incentive to restructure benefits outside of pensions solely for tax reasons.

What This Means for Individuals and Families

For individuals with defined contribution pensions, this reform means that pensions are no longer automatically shielded from IHT. While most estates will not be affected due to their size, those with higher-value pension holdings may now see a portion of their wealth subject to tax on death.

Funds in drawdown on death will form part of the deceased’s estate. If then moved into beneficiary drawdown, any funds remaining in drawdown on the beneficiary’s death would form part of the beneficiary’s estate.

How Lonsdale Financial Advisers Can Support You

Lonsdale’s experienced and FCA-authorised independent financial advisers can help you:

Understand the full implications of the 2027 changes on your estate.
Review your existing pension arrangements and identify whether your beneficiaries could be affected.
Model potential IHT liabilities and explore ways to reduce them, including lifetime gifting strategies, insurance options, or revised beneficiary planning.
Support executors and Personal Representatives through the reporting and tax payment process when a death occurs.

Allan Ross, Independent Financial Adviser (IFA) in Ware, said:

“Our financial advice is fully tailored to your situation and is always in your best interests. With expert guidance, we can help ensure that your wealth is passed on tax-efficiently and in accordance with your wishes.”

Speak to a Lonsdale Adviser Today

If you are concerned about how these changes to pension taxation may affect your estate or your loved ones, we recommend acting now. The earlier you review your inheritance tax planning, the more options you will have available to minimise exposure to Inheritance Tax.

To arrange a confidential consultation with a Lonsdale independent financial adviser, contact your local office or complete our enquiry form online.

Please note: A pension is a long-term investment not normally accessible until age 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. The Financial Conduct Authority does not regulate estate planning or tax advice. This article is for information only and does not constitute advice.

Sources: www.gov.uk, www.thetimes.co.uk, www.thetimes.co.uk/why-you-need-to-tear-up-your-retirement-plans

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