What are the Government Plans for Inheritance Tax on Pensions?

The majority of UK registered pension schemes are discretionary and therefore fall outside of the estate for inheritance tax purposes. However, in the Autumn Budget 2024, the Government announced changes to unused pension funds and death benefits. From April 2027, most unused pension funds and death benefits will be included in inheritance tax calculations. This applies to both UK registered pensions and qualifying non-UK pensions.

Pension Scheme Administrators (PSAs) will be liable for reporting and paying any inheritance tax due on unused pension funds and death benefits.

The Government is currently running a 12-week consultation on draft legislation for these changes. There are six parts to this consultation:

Part 1 – summarises the changes to inheritance tax

Based on government statistics, less than 10% of estates annually are forecast to have an inheritance tax liability. It is argued that inheritance tax should be applied as consistently as possible across different types of assets including pensions. The government have advised that tax relief on pensions is one of the most expensive reliefs in the personal tax system and it is crucial that tax relief on pensions are being used for their intended purposes, which is to encourage saving for retirement and later life.

Part 2 – reviewing the different types of pension schemes

There are two main types of registered pension scheme:

1. Defined Contribution (DC) – this is a pension pot based on how much is paid in.
2. Defined Benefit (DB) – this is usually a workplace pension which is determined by members’ salary and length of service rather than the amount paid in.

The consultation will also consider how discretionary and non-discretionary pensions are currently treated for inheritance tax purposes and how the changes will take effect from 6 April 2027. This will include information on how inheritance tax on pensions will be calculated, reported and paid to HM Revenue and Customs.

Part 3 – summarising the new process

This will include:

1. Personal representatives to notify the pension scheme administrators of members death;
2. Pension scheme administrators to determine whether any unused pensions or death benefits are payable, who the nominated beneficiaries are and the amount payable.

Part 4 – Impact Review

This consultation will review the impact of these changes to include impact on individuals, households and families.

Part 5 – Questions Raised

This consultation will review the questions raised and various case studies.

Part 6 – Setting out the process

This consultation sets out the process for responding.

The results of the consultation will be published in 2025.

If you would like to discuss inheritance tax or estate planning, please call us on 01279 295047, or complete our enquiry form and we will be in touch.