From April 2027, inheritance tax will extend to include certain unused pension funds, and HMRC is expected to publish further technical details this autumn. The change will affect every pension scheme, according to financial planners, who warn that the full impact is not yet known.
What the new tax means
Inheritance tax is a 40 per cent levy paid on the total value of an estate above certain individual allowances. Under current rules, you can pass on up to £325,000 in total assets without paying the levy, plus an additional £175,000 when passing on your main residence to a direct descendant. Unused allowances can be passed to a spouse or civil partner, potentially allowing £1 million in assets to be passed on tax-free if they include a main home going to a direct descendant.
Angela Davis, chartered financial planner at Hymans Robertson, said: "It is important not to panic but do understand how the value of your estate will be impacted." The Government has yet to explain exactly how the new tax will work despite the regime taking effect in less than six months.
More details this autumn
Davis said: "HMRC are still publishing technical notes and guidance about the changes and have said that full guidance and supporting materials are planned for spring 2027. An additional technical note is expected this autumn with more detail on international aspects, intestacy, charities and trusts. So until this is in place we won't know the full impact for pensions."
She added that personal representatives (executors) will have increased duties and administration burden, as they will be responsible for locating and listing every pension scheme the deceased held and providing valuations to include in the estate valuation.
Records to keep and two-minute check
Given these extra requirements, people should keep records of the provider, the plan number, and a contact telephone number for each pension. They should also keep their beneficiary nomination, also known as the expression of wish, up to date. Davis said: "Pensions do not automatically follow a will and often people forget to complete the information or it is out of date. This can be done by contacting the pension provider and only takes a couple of minutes."
She also advised: "Every adult should have a will in place and ensure that on life events (marriage, children, divorce for example) that it is kept up to date and mirrors your wishes." An HMRC spokesperson said: "More than 90% of estates will still pay no inheritance tax, including on pension funds. We want to help people get their tax right and we're continuing to provide information about how the taxation of unused pension funds and death benefits will work. We've published detailed notes to provide further clarity, and will publish further guidance ahead of the changes coming into effect."
