The IHT Tax Rules for Pensions

Under current rules, most defined contribution pensions are outside of an individual’s estate.  That will change on 6 April 2027 when the value of any undrawn pension funds or pension death benefits – referred to as “notional pension property” – will be added to the estate .  If the total estate (including pension wealth) exceeds available nil‑rate bands, the excess will be taxed at 40 %.  This applies to deaths on or after 6 April 2027; deaths before that date remain under the existing regime .

Pension scheme administrators will need to provide personal representatives (PRs) with an open‑market valuation of the deceased’s pension pot at the date of death .  Where values are difficult to establish – for example, commercial property in a self‑invested personal pension (SIPP) – estimates may be used initially, but a final value must be provided as soon as it is available .

Which pension benefits are affected?

• Defined contribution (money purchase) pensions: Undrawn pots and lump‑sum death benefits will form part of the estate.  Defined benefit schemes are generally unaffected because members cannot normally pass on a fund .
• Beneficiary pensions: Dependants’ or nominees’ pensions paid as an income remain subject to the usual income tax rules and are excluded from IHT .
• Death‑in‑service benefits: Lump sums paid on death while in employment will remain outside the estate provided they meet the statutory conditions .  These benefits are typically multiples of salary and are usually excluded from IHT.
• Spouse/civil partner and charities: The spousal and charitable exemptions still apply; pensions left to a surviving spouse or registered civil partner, or to a charity, are exempt from IHT .  However, pensions left to children, grandchildren or other relatives will now be counted.

The end of pension administrators’ liability: PRs take centre stage

Early proposals suggested that pension scheme administrators would be responsible for reporting and paying the IHT due on pension benefits, but this was reversed after industry concerns.  HMRC’s technical note confirms that personal representatives (usually the executors of the estate) will be responsible for reporting and paying any IHT due on the pension element .  Pension scheme administrators will still have duties to provide valuations and respond to notices, but the administrative burden now rests with families and their executors.

This shift means PRs must:

1. Identify all pension arrangements: PRs are expected to take reasonable steps to find every pension pot, including historic workplace schemes.  HMRC guidance suggests searching through paper and online records, contacting providers and speaking with relatives .  Without a comprehensive Pensions Dashboard (not yet available), this could be challenging .
2. Obtain valuations and beneficiary details: PRs must request date‑of‑death valuations and beneficiary information from each scheme and include these in the IHT account .
3. Calculate and pay tax on time: IHT on pension wealth is due six months after the end of the month of death .  Late payments will attract interest.
4. Co‑ordinate with beneficiaries: PRs must determine whether beneficiaries are exempt (spouses, civil partners, charities) and allocate tax accordingly .

Failing to follow the new rules could expose PRs to personal liability.  With the first deaths affected in April 2027, now is the time to start organising estate information.

New tools: Withholding notices and the Pensions Direct Payment Scheme

Recognising that large IHT bills may be unaffordable for estates with limited liquid assets, the Finance Act 2026 introduces two important mechanisms:

1. Withholding notices

A withholding notice allows a personal representative to instruct a pension scheme administrator to withhold up to 50 % of a beneficiary’s entitlement for up to 15 months after the date of death .  This prevents beneficiaries from receiving the entire pension before the IHT position is finalised.  The key features include:

• Used only when IHT is likely: HMRC expects withholding to be used sparingly and only when the PR knows or reasonably believes that IHT may be due on the pension .
• Not applicable to exempt benefits: Payments to a spouse or charity, or death‑in‑service benefits, cannot be withheld .
• Time limits: The notice must be issued within 15 months of death and ceases when the tax is paid, the PR withdraws it or the 15 months expire .
• Protection for PRs and beneficiaries: By withholding funds, PRs avoid using other estate assets to meet the tax bill and ensure beneficiaries receive at least 50 % of their entitlement promptly .

2. Pensions Direct Payment Scheme (payment notices)

The Pensions Direct Payment Scheme lets PRs or beneficiaries instruct the pension scheme to pay the IHT and interest directly to HMRC from the pension fund .  The scheme must pay the specified amount within 35 days of receiving a valid payment notice .  Important points:

• Who can issue a payment notice? PRs (once appointed), individual beneficiaries and trustees of trusts can issue a notice; prospective PRs cannot .
• Minimum amount: The notice must be for at least £1,000 and must specify the exact tax and interest due .
• Optional but useful: This mechanism helps pay tax before probate is granted, particularly where pensions make up a large portion of the estate .

These tools should make it easier for families to settle IHT without having to find cash outside the pension.  Pension scheme administrators who fail to comply with a valid withholding or payment notice may become jointly liable for the tax .

Why does it matter?

Professionals warn that the new regime adds complexity and risk for families and executors.  A leading law firm notes that families often struggle to locate all pension pots, especially where records are fragmented or online, and that there is no clarity yet on what constitutes “reasonable steps” to locate them .  The note also highlights how valuations of illiquid pension assets (such as commercial property in SIPPs) could delay estate administration .

The administrative burden has therefore shifted from pension providers to families.  Executors will need to gather information, deal with both IHT and income tax on inherited pensions (if the deceased died after age 75), and manage new compliance rules .  While HMRC estimates that only around 1.5 % of estates will incur additional IHT liability , many more will need to follow the new processes.  Beneficiaries may also face double taxation: pension funds included in the estate for IHT and subject to income tax when drawn, leading to effective tax rates of 64–67 %  .

Practical steps

If you hold significant pension wealth or act as an executor, consider the following:

1. Review your expression of wishes: Make sure your pension nominations are up to date.  Expression‑of‑wish forms should be lodged with each pension provider to avoid delays .
2. Keep records of all pensions: Maintain an up‑to‑date list of pension providers, policy numbers and contact details.  This will help your executors locate all your schemes .
3. Check beneficiaries’ tax status: Understand whether your pension beneficiaries are exempt (spouse, civil partner, charity) or non‑exempt.  Non‑exempt beneficiaries may face both IHT and income tax.
4. Consider estate planning strategies: Some individuals may wish to spend more of their pension during their lifetime, use ISAs or insurance policies, or make lifetime gifts to reduce exposure to IHT .  Always seek professional advice before making changes.
5. Prepare executors: If you are likely to be an executor, familiarise yourself with the new rules and gather necessary documents early, including valuations and evidence of identity .
6. Seek professional advice: The new rules are complex and the right strategy depends on personal circumstances, including other assets, age, health and wishes for beneficiaries.

How Celtic Financial Planning can help

At Celtic Financial Planning Ltd, we specialise in holistic financial planning and wealth management for clients across North Wales, Chester and the Wirral.  Our advisers can help you review your pension and estate plan in light of the 2027 IHT changes, ensuring your arrangements reflect your goals and your family’s needs.  We will work with your solicitors and tax advisers to ensure your nominations, wills and trusts are aligned and keep you informed of further HMRC guidance as it is released.

If you would like to discuss how these reforms might affect you or your family, please contact us today.  Our experienced team is here to help you navigate this evolving landscape with confidence.