New HMRC inheritance tax (IHT) rules will bring most unused pension funds and pension death benefits into a deceased person's estate from 6 April 2027, a change that has been labelled an "administrative nightmare" and criticised by the pensions sector. The government is pressing ahead with the plans despite repeated concerns from industry figures.
What changes from April 2027
According to an HMRC technical note, from 6 April 2027, most unused pension funds and pension death benefits will be included in the value of a dead person's estate for Inheritance Tax purposes. The tax authority says the change will remove distortions that have led to pension schemes being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for funding retirement. It adds that the change will also address inconsistencies in the IHT treatment of different types of pensions.
The change will apply to deaths occurring on or after 6 April 2027. If a pension scheme member dies before that date, the existing rules will continue to apply, even if pension benefits are paid to beneficiaries after that date, HMRC says.
Current rules and government estimates
At present, most personal pensions are not considered part of a person's estate, meaning they are not subject to inheritance tax and beneficiaries can inherit them without paying IHT. The proposals were put forward by former Chancellor Rachel Reeves at the 2024 Autumn Budget. The Treasury has said the change is designed to prevent pension schemes from being used and marketed as a tax planning vehicle to transfer wealth rather than for their intended purpose of funding retirement.
Legal & General says pension scheme members can currently set aside unlimited funds – subject to the lump sum allowance and lump sum and death benefit allowance – untouched within a pension product, passing them to beneficiaries free of IHT. The government estimates that from 2027 to 2028, of around 213,000 estates that will include pension wealth, about 10,500 will likely face an IHT charge.
Industry criticism and implementation timeline
This autumn and winter, HMRC is circulating draft guidance among industry stakeholders. Between winter and spring next year, it says communications activity will take place "to publicise upcoming changes to impacted groups". By spring next year, it says it will publish guidance and other supporting materials.
The proposals have drawn considerable concern from the pensions and financial advice sectors. The Investing and Saving Alliance urged the government to consider a simpler system and published a paper entitled Alternative Approaches to Taxing Unused Pension Wealth at Death.
Tom Selby, Director of Public Policy at AJ Bell, said in 2025: "While the decision to tax pensions on death is a matter for government, IHT is arguably the most complex, time-consuming way of achieving that policy goal. If the Treasury refuses to budge, it will be the bereaved families of people who have saved diligently all their lives who will be left to handle this administrative nightmare. Anyone who has had the misfortune of dealing with IHT knows that probate can already be a tortuous process without throwing the complexity of potentially multiple pensions into the mix."
Anne Fairweather, Head of Government Affairs & Public Policy at Hargreaves Lansdown, said: "The proposed changes have caused confusion for people's retirement strategies and will bring extra complexity to families at an already difficult time having lost a loved one."
Ongoing concerns over uncertainty
Quilter retirement specialist Adam Cole told PensionAge earlier this year: "This represents one of the most significant changes to pension taxation in a decade and fundamentally alters long standing estate planning strategies. We have consistently highlighted that the government's current approach risks creating significant complexity and administrative burden for grieving families, who could face lengthy delays as personal representatives gather valuations, submit forms and settle IHT on pension assets alongside the rest of the estate. These proposals mean the process at death is likely to become more complex, with delays also anticipated in payments to non-exempt beneficiaries."
This week, St James's Place chief executive Mark FitzPatrick told the Times: "Saving for retirement requires people to make decisions that may shape their financial future for 20, 30 or 40 years. For that to work, people need reasonable confidence in the framework in which they are saving." He added: "Reforms will sometimes be necessary, but at a time when too many people are already not saving enough for retirement, policymakers should be mindful of creating uncertainty that could make that challenge harder."
