Pension inheritance and estate planning: What the proposed inheritance tax changes could mean for you

For many families, pension inheritance forms an important part of their wider estate planning strategy. Traditionally, pensions have been one of the most tax-efficient ways of passing wealth to future generations, with unused pension funds generally sitting outside an individual's estate for Inheritance Tax (IHT) purposes.

However, proposed changes to the law could significantly alter the relationship between inheritance tax and pensions from 6 April 2027. If implemented, these changes may affect how much your loved ones inherit and could require many people to review their existing estate planning, wills, and pension arrangements.

How are pensions currently treated for Inheritance Tax?

One of the questions we are frequently asked is: "Do pensions form part of my estate?"
At present, the answer is usually no.

Most UK pension schemes are established so that any death benefits are distributed at the discretion of the pension trustees or scheme administrators. Because these benefits are discretionary, unused pension funds, including Self-Invested Personal Pensions (SIPPs), generally fall outside your estate for Inheritance Tax purposes.

During your lifetime, you may choose to withdraw money from your pension as a lump sum or leave the funds invested and take income through drawdown as required, subject to the relevant pension taxation rules. This flexibility has enabled many individuals to preserve pension wealth for their pension beneficiaries, while using other assets during retirement.

Proposed changes to inheritance tax and pensions from 6 April 2027

The Government has announced proposals to include most unused pension funds within the value of a person's estate for Inheritance Tax purposes from 6 April 2027. If these proposals become law, unused pension funds may be subject to Inheritance Tax as well as any income tax payable under the existing pension taxation rules.

For individuals who had intended to leave pension wealth to their children or grandchildren, this could represent a significant change. While pension funds may still pass to your chosen beneficiaries, they may no longer do so free from Inheritance Tax.

If the inclusion of unused pension funds causes your estate to exceed the available Inheritance Tax thresholds, the value above those thresholds could be taxed at 40%, depending on your personal circumstances and who inherits your estate.

For larger estates, the position may become even more complex. If including unused pension funds increases the overall estate above £2 million, the Residence Nil Rate Band may begin to taper away. This could reduce the available tax-free allowances and increase the overall Inheritance Tax liability, particularly where estates are ultimately passing to children or grandchildren following the death of the surviving spouse or civil partner.

What happens to my pension when I die?

Many people also ask: "Who inherits my pension?"

Under the current rules, pension trustees usually decide who receives the death benefits, considering your ‘Expression of Wishes’ (sometimes referred to as a pension nomination form).

Although your Expression of Wishes is not usually legally binding, it is one of the most important documents pension trustees consider when deciding who should receive your pension benefits. Keeping this document up to date following major life events such as marriage, divorce or the birth of children remains essential.

Under the proposed rules, ensuring your pension nominations remain accurate will become even more important as they form part of your wider estate planning strategy.

Which pension arrangements may remain exempt?

The proposed changes are not expected to affect every type of pension arrangement. Current proposals suggest that the following may remain outside the new rules:

• Dependants' pension schemes.
• Death in service benefits paid through an occupational pension scheme.
• Joint life annuity arrangements.

The exact scope of these exemptions will depend upon the final legislation.

How could these changes affect estate administration?

The proposed changes may create several practical challenges for families and personal representatives responsible for administering an estate. Estates that previously had little or no Inheritance Tax liability may become taxable because unused pension funds are included when calculating the estate's value.

There is also a risk that valuable tax reliefs and allowances, including the Residence Nil Rate Band, may no longer be available where the inclusion of pension assets pushes an estate above the relevant thresholds.

Personal representatives will also have additional responsibilities. Rather than pension providers accounting for the Inheritance Tax position, personal representatives are expected to report the value of unused pension funds to HMRC and ensure any associated tax is paid. Obtaining accurate information from pension administrators may take time, potentially delaying the submission of Inheritance Tax returns. Where tax cannot be paid on time because pension information is outstanding, estates may incur interest charges.

The proposals are also expected to change the way pension information is reported to HMRC, increasing the administrative burden for those responsible for estate administration.

How HCB Solicitors can help with pension and estate planning

At HCB Solicitors, our experienced Private Client solicitors can help you understand how the proposed changes to inheritance tax and pensions may affect your family. Working alongside your independent financial adviser or pension specialist, we can:

• Review your pension nominations and Expression of Wishes forms.
• Review your existing will as part of your wider estate planning arrangements.
• Consider how your pension assets fit within your overall inheritance tax planning.
• Work with your pension adviser to discuss whether lifetime drawdown or annuity options are appropriate for your circumstances.
• Liaise with your independent financial adviser to explore whether alternative planning strategies, such as life insurance written in trust, may better meet your estate planning objectives.

Review Your Estate Planning Before the Rules Change

The proposed changes highlight the importance of reviewing your estate planning regularly rather than waiting until legislation comes into force. Whether you are asking "Can pensions be included in my will?", "Do pensions form part of my estate?" or "How can I reduce Inheritance Tax on my estate?", obtaining specialist legal advice can help ensure your affairs are structured as efficiently as possible.

If you would like advice on pension inheritance, Inheritance Tax, will writing, or wider estate planning, our experienced Private Client team at HCB Solicitors is here to help. Contact us today to arrange a confidential discussion about protecting your wealth and planning for future generations.