Inherited Pensions

The recent Budget included an announcement that from 6th April 2027, when a pension scheme member dies with unused funds or without having accessed all of their pension entitlements, it will be treated as being part of that person’s estate and may be liable to Inheritance Tax. The current distinction in treatment between discretionary and non-discretionary schemes will be removed.

The change will apply to both Defined Contribution/Money Purchase Pension pots, Lump Sums from Defined Benefit Pension schemes and Group Death in Service Schemes. It will apply equally to UK registered schemes and unapproved non-UK pension scheme (QNUPS). This will mean that the benefits from most pension benefits and Group Death in Service benefits (for deaths from 6th April 2027 onwards) will be subject to Inheritance Tax unless exempt though an “inter- spouse exemption”.

A small number of specified pension benefits will still remain outside the scope for Inheritance Tax, including where funds can only be used to provide a dependants’ scheme pension.

Pension scheme administrators will become liable for reporting and paying any Inheritance Tax due on pensions to HMRC. This will require pension scheme administrators and personal representatives to share information with one another - a technical consultation has been issued on the processes required to implement these changes for UK-registered pension schemes. After the consultation, the government will publish a response document and carry out a technical consultation on draft legislation for these changes in 2025, so it’s possible the final rules may change.

Pension Schemes are, however, still one of the most tax efficient means of saving for retirement. The government continues to incentivise pension savings for their intended purpose of funding retirement, supported by ongoing tax reliefs on both contributions into pensions and on the growth of funds held within a pension scheme.

For death before 6 April 2027, it’s important to be aware that most pension schemes aren’t subject to Inheritance Tax and therefore it’s still VERY important to consider whom you wish to receive your pension pot on your death.

Beneficiaries (i.e. those you want to pass your money onto) may be able to receive tax-free withdrawals if you die before the age of 75 – but there are restrictions on the amount that can be paid out tax-free as a lump sum.

It’s important to bear in mind that any money taken out of a pension pot during your lifetime, even on deaths before 6th April 2027, could still form part of someone’s estate if not spent at the time of death and the total value of the estate exceeds the amount of Nil Rate Band and Residential Nil Rate Band that can be claimed by the Estate.

Money left in your pension pots can be passed on to your dependents or family potentially tax-efficiently, depending on:

• the type of pension plan and the features and benefits it offers - not all pension plans offer full flexi-access drawdown for beneficiaries which may result in all the money being paid out to a beneficiary as a lump sum.
• who is “named” on your “Expression of Wish” to benefit from you pension – note your Will won’t do this for you.
• your age at death - if death occurs after age 75, the beneficiaries will have to pay income tax at their highest marginal rate on any withdrawals taken by them from your pension pot.

You can provide the Pension Scheme Trustees with details of who you would prefer the funds to be passed on to by completing an Expression of Wish form, but the Pension Scheme Trustees will still have “discretion” over who pay the pension benefits to in order for the pension not to be subject to IHT. However, the Trustees will usually take into account your wishes when deciding who to pay your pension savings to but may not be bound by your wishes.

You can also ask for the money to be paid to a family trust or to a registered charity (via a ‘charity lump sum death benefit’), a sum of money paid to a registered charity on death, that will also be tax-free.

There are some rules around this though, for example the charity must be nominated by you (rather than by your executor) and you can’t have any dependents at the time of payment. For the purposes of this rule, a dependent is a spouse, civil partner, a child under the age of 23, disabled child of any age and some co-habiting partners.

It’s really important to get advice on this matter and to check that your beneficiary arrangements are up-to-date, especially if you have multiple pension plans and/or complex family circumstances.

Whilst you can transfer your pensions into one plan (to help make it simpler to manage and ensure all your arrangements are accurate), however transferring pensions isn’t right for everyone.