The government has confirmed that it will bring most unused pension funds and death benefits into scope of inheritance tax from 6 April 2027, despite growing concerns from the pensions industry.
First announced during the 2024 Autumn Budget, the draft legislation means that from this date, personal representatives will be liable to report and pay any inheritance tax due on unused pension funds or death benefits.
Death in service benefits payable from a registered pension scheme and dependant’s scheme pensions from a defined benefit arrangement, or from a collective money purchase arrangement, are excluded from these changes and will not be in scope of Inheritance Tax.
The government says the measure "removes distortions which have led to pension schemes being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for funding retirement".
The policy paper added that this has been exacerbated by the introduction of pensions freedoms in 2015 and the abolition of the lifetime allowance in March 2023.
Proposed revisions
Between October 2024 and January 2025, the government consulted on the process for reporting and paying inheritance tax on unused pension funds and death benefits, proposing that pension scheme administrators would be liable for reporting and paying any inheritance tax on the pension element of an individual’s estate.
The government has now published a formal response, announcing that personal representatives, rather pension scheme administrators, will be liable for reporting and paying any inheritance tax due. It also confirmed that death in service benefits payable from a registered pension scheme will remain out of scope of inheritance tax.
Most estates will continue to have no inheritance tax liability after April 2027. The government estimates that, of around 213,000 estates with inheritable pension wealth in 2027 to 2028, 10,500 estates will have an inheritance tax liability where previously they would not. Approximately 38,500 estates will pay more inheritance tax than would previously have been the case. The average liability is expected to increase by around £34,000 when pension assets are included in the value of the estate.
These estimates are static and do not take into account potential behavioural changes, such as tax planning or drawing down pension funds faster, which may reduce the number of estates affected. As such, the government says these projections should be viewed as a maximum.
The measure is expected to raise £1.46bn per year for the government by 2029/30.
Roddy Munro, pension specialist at Quilter, commented: “Bringing unused pensions into the ambit of inheritance tax (IHT) is more than a technical footnote change from the Treasury. It is a seismic shift in how we now think about and plan for retirement and estate planning. The Treasury has today released draft legislation to bring undrawn pensions into scope for inheritance tax from April 2027. While the policy is now settled and financial plans are already beginning to change to accommodate it, the details of its implementation carry significant implications for families, advisers and pension providers.
“The government has already consulted on the policy and has thankfully listened to some responses. For example, a question mark had been left on whether death in service benefits payable from a registered pension scheme would be out of scope, which has today been confirmed. Additionally, significant concerns around the proposal to make pension scheme administrators (PSAs) liable for reporting and paying were noted within the consultation responses and the government has opted not to proceed with the PSA-led approach set out in the technical consultation document as a result.
“However, without further amendments, how the policy is eventually enacted risks turning a targeted tax reform into an administrative minefield. What we could end up seeing is a massive transfer of private wealth back to the state. What’s more, while only a small fraction of estates will pay more tax, a far greater number will face needless complexity, delays, and stress – often at the worst possible time.
“While this certainty brings much more clarity, clients are already acting. Trusts and other legacy planning tools are moving into the mainstream. And while policy will continue to evolve, the need for robust, well-informed advice will be critical.
“As the policy progresses, we will continue to feed into how the government can refine and develop the process for pensions and the payment of IHT. The industry has offered workable alternatives, and it’s time for the Government to listen.”
