Introduction
Significant changes are set to be introduced to UK inheritance tax policy following the Chancellor's announcement that, from April 2027, unused defined contribution pensions will become subject to inheritance tax.
The reform, which was outlined in the Chancellor's recent Budget, shifts the tax landscape for pensioners, their families, and those responsible for dealing with estates after death. The move is expected to increase the complexity of probate proceedings while raising additional revenue for the Treasury.
New inheritance tax measures to affect pensions from 2027
Chancellor Rachel Reeves has confirmed that from April 2027, defined contribution pensions that remain unused at the time of death will be brought within the scope of inheritance tax. This change represents a significant departure from existing tax policy, under which pension pots could often be passed on to beneficiaries without inheritance tax being levied.
The measure is targeted at pensions typically invested in the stock market, rather than defined benefit or final salary schemes. According to official statements, the Treasury expects the change to generate additional tax revenue, though the exact amount has not been formally published. The reform is scheduled to come into effect for deaths occurring on or after 6 April 2027.
Details of the policy change and its scope
Under the revised rules, unused savings in defined contribution pension plans excluding most public sector final salary schemes will count towards a deceased individual's taxable estate for inheritance tax purposes. The nil-rate band, currently set at £325,000, as well as the extended threshold of £500,000 for those passing on a home to direct descendants, will continue to apply.
These rules mean that, in practice, more estates may exceed the inheritance tax threshold, especially when the combined value of pensions and property is considered. The change will not apply to pensions already in payment as an annuity, nor to state pensions or most final salary schemes.
Current rules on pensions and inheritance tax
Until the new rules come into effect, defined contribution pensions not yet accessed can typically be passed on outside the scope of inheritance tax if the pension holder dies before the age of 75. After 75, the beneficiary is taxed on withdrawals at their income tax rate, rather than through inheritance tax.
This longstanding system has made pensions a valuable tool for intergenerational wealth transfer and estate planning. The upcoming change will align pensions more closely with other assets for tax purposes. It is anticipated that the revised policy will affect the timing and manner in which many individuals draw on their pension savings.
Implications for executors and bereaved families
Administering a deceased person's estate is already a complex and time-consuming process. Executors must value all assets, pay outstanding debts, organise probate, and handle communication with HM Revenue and Customs (HMRC). These responsibilities can involve considerable administrative and legal challenges.
The inclusion of unused defined contribution pensions in the taxable estate will add a further layer of complexity. Executors will now need to identify and value all relevant pensions before probate can proceed. Official estimates suggest that untraced pension savings in the UK may total up to £30 billion, heightening the risk of pensions being overlooked or probate being delayed.
Potential impact on pensioners and ordinary households
While the change will primarily affect estates valued above the existing inheritance tax thresholds, a growing number of ordinary households may find themselves caught by the new rules, especially given rising property prices. Families inheriting estates that include both property and pension savings may be required to pay inheritance tax where none was previously due.
The new inheritance tax measure is expected to make it more challenging for pensioners to plan for the transfer of their wealth. Some individuals may face difficulty finding willing executors, as the responsibilities and complexities of the role increase.
Final Summary
The planned inclusion of unused defined contribution pensions in the inheritance tax net reflects a significant policy shift, set to impact the way British families plan for the transfer of assets. While the measure is likely to increase government revenue, it brings additional responsibilities for executors and may result in more families facing complex probate processes.
The reforms highlight the importance of timely and thorough estate planning. For further updates and tools assisting with estate and inheritance planning, users may wish to monitor resources available via the Pie app.
