At MaxPro Accountants, we believe in keeping our clients – and indeed, everyone – informed about significant legislative changes that could impact their personal tax positions and liabilities. It’s crucial to stay ahead of the curve, especially when it comes to your financial future.
Recently, we’ve been closely monitoring a development that could have a substantial effect on how unused pension pots are treated upon death. The government has published draft legislation proposing the imposition of Inheritance Tax (IHT) on these funds, with an implementation date as early as April 2027.
This measure, aiming to bring “most unused pension funds and death benefits” into the scope of IHT, is designed to “remove distortions which have led to pension schemes being increasingly used and marketed as a tax planning vehicle to transfer wealth.” While death-in-service payments are currently excluded, the broader implication is clear: the landscape of pension wealth transfer is set to change.
The proposal, which underwent consultation between October 2024 and January 2025, has already drawn considerable commentary from pension specialists. Many have described it as an “administrative minefield,” warning of a potential “massive transfer of private wealth back to the state.” The concern is that while only a small fraction of estates might ultimately pay more tax, a far greater number could face “needless complexity, delays, and stress – often at the worst possible time.”
The forthcoming Finance Bill 2025-26 is expected to enshrine this legislation, making the value of unused pension pots and pension death benefits part of the deceased’s estate for IHT purposes. This will apply “regardless of whether the pension scheme administrators or scheme trustees have discretion over the payment of any death benefits.”
The government’s projections indicate a significant revenue boost for HMRC, with an estimated extra £640 million in the first year alone (2027-28), rising to £1.34 billion by 2028-29. While only a small percentage of the population currently pays IHT, the government anticipates around 213,000 estates being subject to IHT in 2027-28, with 10,500 of those impacted specifically by their pension pots. The average IHT bill for those affected is projected to increase by £34,000.
It’s clear that incorporating pensions into the IHT framework could introduce considerable complexities for individuals, beneficiaries, and even HMRC itself. This could lead to confusion and stress for bereaved families during an already difficult period.
Understanding the nuances of these changes is vital for effective financial planning. We encourage you to proactively review your pension arrangements in light of this potential legislation.
CONTACT US HERE today to discuss how these changes might affect your personal tax position and to ensure your financial planning is robust and effective.