Unused Pension Benefits to Face IHT Charges from 2027

New IHT Rules for Unused Pension Benefits from April 2027

Overview

From 6 April 2027, inheritance tax (IHT) will apply to unused pension funds and death benefits left in an estate. Announced in the Autumn 2024 Budget, this change will increase the IHT burden on estates where pension wealth is passed on after death and not fully sheltered by available nil-rate bands or exemptions.

Government figures estimate that of the 213,000 estates with inheritable pension wealth, around 10,500 will face an IHT bill for the first time, while another 38,500 estates will pay more IHT than under current rules.

Why the Change?

The government believes that pensions are increasingly being used as a wealth transfer tool rather than solely for retirement savings. This concern grew after the lifetime allowance was abolished, allowing individuals to save unlimited amounts tax-free in pensions.

Currently, most UK pension schemes are discretionary, meaning trustees decide on how benefits are paid. Under this setup, unused pension pots can pass free of IHT. By contrast, non-discretionary schemes (like NHS or judicial pensions) are already treated as part of the estate for IHT.

The New Rules (From April 2027)

• Unused pension funds and death benefits will be counted as part of an individual’s estate on death.

• This applies regardless of whether scheme trustees or administrators hold discretion.

• Death-in-service benefits will remain exempt from IHT, whether from discretionary or non-discretionary schemes.

• Spouse/civil partner exemptions and charity exemptions will continue to apply to pension benefits.

Administration & Responsibility

The responsibility for paying IHT on unused pensions will fall on the personal representatives of the deceased, rather than pension scheme administrators. This change reflects consultation feedback on making the process more straightforward and consistent.

Key Takeaway

From April 2027, passing on unused pension wealth will no longer be automatically tax-free. Individuals with significant pension savings should review their estate planning to ensure their beneficiaries are not faced with unexpected tax liabilities.

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