The recent publication of draft legislation on Inheritance Tax (IHT) and pension death benefits, due to take effect from April 2027, brings greater clarity—but also increased complexity—for families dealing with bereavement and estate administration.
Under the new proposals, pension death benefits will be brought within the scope of IHT for individuals who die from 6 April 2027 onward, with the responsibility for reporting and paying the tax shifting from pension providers to personal representatives (PRs). This change has significant implications—especially for those with multiple, fragmented pensions.
What’s Changing?
The new rules introduce a 4-stage process:
1. Scheme Valuation
Pension scheme administrators will have 4 weeks from the date of death to provide PRs with a formal valuation. If the scheme has discretion over beneficiary payments, it must also confirm how much is going to exempt (e.g. spouse) and non-exempt beneficiaries.
2. PRs Value the Estate
PRs must collect valuations from all pension providers, add them to the value of other assets, and assess whether an IHT account is required.
3. IHT Account Submission
Where tax is due, the PRs must apportion the liability across all pensions, notify HMRC, and inform both beneficiaries and pension schemes of the tax amounts attributable.
4. Payment of Death Benefits
If no IHT is due (e.g. spouse exemption or value below the nil-rate band), benefits can be paid immediately—without waiting for probate.
If IHT is payable, the burden falls on both the PRs and the beneficiaries, who are jointly and severally liable for their share of the tax.
Beneficiaries' Options (If IHT is Due)
Request that the scheme pays the IHT directly to HMRC.
Take the death benefits and pay the IHT themselves (note: if the member died after age 75, this will also trigger income tax—but HMRC will reduce the chargeable amount by the IHT paid).
Where the pension and estate beneficiaries differ, PRs have the legal right to reclaim the IHT paid on pension benefits from the pension beneficiaries, ensuring fairness across all recipients.
Why Consolidation Matters
This all may sound straightforward, but let me assure you: it will not be.
In our experience—and Adam and I have decades of it—pension providers are notoriously slow, inefficient, and error-prone when it comes to even the simplest of administrative tasks. And unfortunately, when families are grieving and vulnerable, this kind of avoidable chaos only makes things harder.
In my “Round Robin” of 22nd July, I noted:
“This complex process will cause bereaved families confusion and stress at a difficult time and doesn’t fit well with the support firms may want to provide people who are likely to be vulnerable following the death of a loved one.”
One simple but powerful step you can take to reduce future stress for your loved ones is to consolidate any fragmented pensions into a single, well-managed scheme. It will mean fewer valuations, less complexity, and more efficient communication between your representatives and the provider—just when clarity and simplicity are needed most.
What You Can Do Now
If you’d like to review your existing pension arrangements and explore the benefits of consolidation, please get in touch. We can talk through the options and assess whether consolidation is suitable for your personal circumstances.
As always, if you have any questions—about this topic or any other aspect of your financial planning—don’t hesitate to contact me. And if you know someone else who may find this information useful, feel free to pass it on.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
