Changes to Inheritance Tax on Pensions from April 2027
Background
In the 2024 Autumn Budget statement, Rachel Reeves proposed changes to the way that pension benefits are treated for the purpose of inheritance tax (IHT). This Finance Bill change brings any unused pension funds (uncrystallised and/or residual pension funds not yet drawn down or annuitised) and pension death benefits into the valuation of the deceased’s estate for IHT from 6 April 2027.
The consultation was published on 30 April 2024; feedback was sought from the industry, and draft legislation and a consultation response were published on 21 July 2025. Providers had until 15 September to send any further comments or feedback. The legislation will be formally introduced with the Finance Bill 2025-26 changes. This update is based on our current understanding of the consultation and draft regulations, and the impact on Annuities only.
Why are the changes being made?
The Treasury said,
‘This change has been introduced to prevent pension schemes from being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for their intended purpose of funding retirement.’
Currently this means that a pension scheme member could save unlimited funds (subject to the LSA and LSDBA) untouched in a pension product to be passed free of IHT to their beneficiaries. 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.
Are death benefits paid from a pension fund subject to IHT under today's rules?
Under today’s rules, death benefits paid from most pension schemes are usually excluded from the valuation of the estate for IHT purposes. In some scenarios IHT could still apply to pension funds even under today’s rules, ie if they are non-discretionary schemes (not written under trust) where:
- The member chooses (nominates) the beneficiary, rather than it being at the discretion of the scheme trustees.
- The member is in ill health, transfers benefits from one pension scheme to another, and dies within two years of the transfer. It also applies where there have been increased, or unusual, levels of contributions and the member dies within two years from ill health.
- Death benefits are paid from a Retirement Annuity Contract (RAC) or Section 32 (S32), unless the benefits are held under trust.
What are the changes from April 2027?
IHT is currently payable at 40% on estates valued above the nil-rate band (£325,000) and the residence nil-rate band (£175,000), where applicable. Based on current understanding, the upcoming changes will apply to members who die on or after 6 April 2027. However, these proposed changes have immediate implications for tax planning now, for those members that hold products in scope or are looking to pay death benefits to non-spouse/civil partner.
In scope | Out of scope |
|---|---|
Dependant’s annuity/Drawdown (excluding spouse/civil partners) | Death benefits paid to a spouse/civil partner or registered charity |
Nominee’s and successor’s annuity/Drawdown | Death in service benefits from discretionary and non-discretionary schemes |
Short-term annuities | Joint life annuities (spouse/civil partner/partner/another survivor) |
Lump sum death benefit payment (not being paid to a spouse/civil partner or charity) | Dependant’s scheme pension |
Trivial commutation lump sum death benefit, unless it is commutation of a dependant's scheme pension (DB schemes) | Trivial commutation of a dependant’s scheme pension (DB schemes) |
Annuity protection lump sum death benefit | Single life annuities |
Proposed key changes:
- The value of unused pension funds and pension death benefits will count towards the member’s estate on death, regardless of whether it is a discretionary* or non-discretionary scheme, unless it is being paid to a surviving spouse/civil partner, or to a registered charity.
- If the member dies after the age of 75, income tax will still apply, meaning that some beneficiaries could face both income tax and IHT charges. Income tax may be reclaimable from HMRC but only where overpaid, and this will depend on the beneficiary’s marginal rate and timing of payment.
- The liability for reporting and paying IHT due will sit with the Legal Personal Representatives (LPRs), within six months of date of death (this aligns with standard IHT reporting deadlines under S216 IHTA 1984).
- Beneficiaries receiving death benefits subject to IHT will be jointly responsible alongside the LPRs for paying any tax due.
- A new requirement for pension scheme administrators to provide information about the value of any unused pension funds/death benefits within four weeks of being notified of the death.
- Pension scheme administrators will need to deliver IHT solutions that support the Pensions Inheritance Tax Payment scheme and support the LPRs in paying IHT.
Reporting and paying Inheritance Tax (IHT)
A step-by-step guide for legal personal representatives and pension schemes to follow when reporting and paying Inheritance Tax (IHT).
Legal personal representative
- Identify pension benefits
- Notify pension scheme of death of member
- Flag if surviving spouse/ civil partner
Pension scheme
- Determine beneficiaries
- Provide value of benefits to personal representative within four weeks
- Notify legal personal representative of how benefits split betweeen exepmt/ non-exempt beneficiaries
Legal personal representative
- Gather info on all pension schemes and estate
- Understand if IHT is payable
- Notify pension scheme if account is needed
Pension scheme
- Receive request for IHT account (where required)
- Receive request for info on beneficiaries
Legal personal representative no IHT
- Confirm to pension scheme if no IHT due
- Proceed to apply probate and pay estate
Legal personal representative IHT
- Calculate tax aount related to pension benefits
- Submit account to HMRC
- Notify pension scheme and beneficiaries of IHT
Pension scheme no IHT
- Determine beneficiaries and pay pension benefits
Pension scheme IHT
- Receive confirmation of IHT liabilities
- Receive request to pay IHT from beneficiaries (if rquired) scheme discretion if under £4k
Legal personal representative/ beneficiaries
- pay estate if no IHT
- Pay IHT charge if not being settled by penion scheme
- Claim back any overpaid tax from HMRC
Pension scheme
- Pay spouse/ civil partner as no IHT liability
- Deduct income tax if deceased was over age 75
- Pay IHT if requested
There are three proposed options available when paying any IHT due under the new regulations:
- It can be paid from the estate, ie the entire IHT liability is settled, which includes the pension funds before probate application.
- Ask the pension scheme to pay it, if it is £4,000 or more. The pension scheme can use its discretion to pay lower amounts as needed. The pension scheme must settle the tax within three weeks of receiving the request.
- Pay the pension beneficiaries and they pay the IHT directly. If the deceased member was over age 75, they may need to request a refund of any overpaid income tax.
How does this impact annuities?
The following table shows the impact of the changes across the Annuities products, based on our current understanding of the changes:
Product | Impact | Tax treatment summary |
|---|---|---|
Pension annuity | If a death benefit option is taken, it will be subject to a ‘check’ against the value of the estate, unless it is set up to provide a death benefit for a spouse/civil partner. | IHT applies to death benefits unless paid to exempt recipients. Income tax may also apply if member dies post-75. |
Cash-Out Retirement Plan | If a death benefit option is taken, it will be subject to a ‘check’ against the value of the estate, unless it is set up to provide a death benefit for a spouse/civil partner. | Same as above: IHT on death benefits unless exempt. Income tax may apply post-75. |
Fixed Term Retirement Plan | If a death benefit option is taken, it will be subject to a ‘check’ against the value of the estate, unless it is set up to provide a death benefit for a spouse/civil partner. | Same as above: IHT on death benefits unless exempt. Income tax may apply post-75. |
Lifetime Care Plan | Sits outside a pension scheme so no impact. | Out of scope for IHT changes. No IHT. |
As part of this change, we will be making a series of updates to ensure you, and your clients, are fully supported. We will be updating our processes, systems and communications to reflect the new requirements for beneficiary data, tax reporting and handling IHT payments.
Inheritance Tax on pensions from April 2027
What financial planners need to know
What is Legal & General doing?
Legal & General has been actively engaged in providing formal feedback on the initial consultation and draft legislation. We are committed to ongoing dialogue with the regulator until the final regulations are laid.
We are committed to supporting you and your clients (including beneficiaries’ LPRs) through this change. This includes:
- Answering queries related to annuity products to support financial planning conversations.
- Providing any information needed to support understanding of the Inheritance Tax Changes.
- Assisting with IHT matters, providing information to support IHT liability calculations, payment and reporting.
- Please note this is our current understanding as of October 2025 based on the consultation and draft legislation and rules; this is subject to change following further updates from HMRC and the final regulations.