The government is pressing ahead with plans despite concerns from many in the pensions sector
Important HMRC tax rules are set to change within a matter of months that have been labelled an “administrative nightmare”. Officials are working through a series of stages in the process ahead of the new regulations coming into force in April 2027. Until now, most personal pensions have not been considered to be a part of your estate.
At the moment, this means they are not affected by inheritance tax. As a result, beneficiaries can inherit them without paying inheritance tax, which can be applie to the value of someone’s estate when they die.
Thanks to plans introduced by former Chancellor Rachel Reeves, that is set to change shortly. Yet the changes have been criticised repeatedly since they were unveiled.
Now a major investment platform has raised concerns over the ‘uncertainty’ many people are experiencing when it comes to planning for their financial future. St James’s Place chief executive Mark FitzPatrick warned this week that people are losing confidence in pensions because of constant changes to the rules.
A HMRC technical note on the proposals says that from 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a dead person’s estate for Inheritance Tax purposes.
The tax authority says the change will eliminate distortions that have resulted in pension schemes being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for funding retirement. HMRC adds that it will also address inconsistencies in the Inheritance Tax treatment of different types of pensions.
The change will apply to deaths occurring on or after 6 April 2027. Should a pension scheme member pass away before 6 April 2027, the existing rules will continue to apply, even if pension benefits are subsequently paid to their beneficiaries after this date, HMRC says.
The current rules on inheritance tax and pensions
In the 2024 Autumn Budget, Rachel Reeves put forward proposals to alter the way pension benefits are treated for the purposes of inheritance tax (IHT). The Treasury has 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.”
At present, Legal & General says pension scheme members are able to 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.
This autumn and winter, HMRC is circulating draft guidance among industry stakeholders. Between winter and spring next year, it says that 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 to suggest alternatives entitled Alternative Approaches to Taxing Unused Pension Wealth at Death.
Tom Selby, Director of Public Policy, AJ Bell said in 2025 as that report was issued: “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.”
Also weighing in on the report at the time, Anne Fairweather, Head of Government Affairs & Public Policy, 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.”
Yet the government is pushing ahead regardless. 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 Mr 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.”
