Pensions and inheritance tax changes

Most pension death benefits will be included in the deceased’s estate for inheritance tax purposes.

It will affect most defined contribution pensions and death benefits. It will not affect defined benefit dependant’s scheme pensions and death-in-service benefits from employer Group Life schemes, which are excluded. Our guide explains the difference between defined benefit and defined contribution pensions.

• Lump sum death benefits paid from unused pension funds.
• Lump sum death benefits paid from drawdown pension funds.
• Lump sum death benefits paid from pension annuity contracts.
• Beneficiary’s drawdown pension.
• Beneficiary’s pension annuity.
• Payments made under a continuing guaranteed period from a pension annuity.

Yes, exclusions include:

• Benefits paid to a spouse or civil partner.
• Benefits paid to a charity.
• Dependant’s scheme pensions.
• Death-in-service lump sum benefits paid from some occupational pension schemes.
• Dependant’s annuities set up at the same time as a member’s annuity.

It’s currently a £325,000 standard nil-rate band, plus £175,000 residence nil-rate band if a home is passed to direct descendants. Find out more about the threshold in our inheritance tax guide.

It’s currently 40% on the value of the estate above the threshold. Use our inheritance tax calculator to help work out how much might need to be paid.

There are several options available:

• The personal representatives of the deceased’s estate can pay and recoup from the pension beneficiary.
• The beneficiary can pay from their own resources.
• The beneficiary may ask the pension scheme to pay the inheritance tax due to HMRC.

No, they are exempt from inheritance tax.

Based on the draft legislation this will only happen if the beneficiary asks them to do so. Pension schemes must offer this option if the inheritance tax liability on the pension scheme death benefit is over £4,000.

Based on the draft legislation, death-in-service benefits from employer sponsored occupational pension schemes are excluded.

It’s exempt from inheritance tax.

HMRC will provide guidance and a calculator for personal representatives and beneficiaries.

Yes. They can pay it themselves or ask the pension scheme to pay the inheritance tax if it’s over £4,000.

No. The changes will only apply where members die on or after 6 April 2027.

Possibly, but this may have income tax implications. You should discuss this with a financial adviser.

Yes, it will, especially if you plan to leave your pension to someone other than your spouse or civil partner.

We suggest you review your nominated beneficiaries and talk to a financial adviser or solicitor.

Yes, we’ll update all member booklets and online resources before 6 April 2027.

All unused pension pots may be included in your estate for inheritance tax purposes. Please talk to a financial adviser or solicitor.

Trivial commutation lump sums may be excluded if they represent a dependant’s scheme pension.

Yes, we’ll provide valuations and beneficiary breakdowns to personal representatives in line with regulations yet to be published by HMRC.

• Personal representatives of the deceased member tell the pension scheme they have died and confirm whether they had a spouse or civil partner.
• Within four weeks of being told of the death by the personal representatives, the pension scheme must provide the personal representatives with the value of the pension death benefit at the date of death (for inheritance tax purposes, assets are valued at the date of death). In a lot of cases, the death claim value will be different as it’s based on the value at the date of notification of death or the date of payment.
• At this stage, the personal representatives don’t need specific information about the beneficiaries, but they do need to know how much (if any) of the death benefit to include in the inheritance tax valuation. So, once the beneficiaries of the pension death benefit are identified or chosen, the pension scheme must tell the personal representatives how much of the benefit is payable to:
  • an exempt person (spouse, civil partner or charity), and
  • a non-exempt person (any other category of beneficiary.
• Where the beneficiary is an exempt person, the pension scheme can pay out their death benefit at this point.
• The pension scheme must tell a non-exempt beneficiary of their share of the death benefit. They should also tell them they may have to pay inheritance tax and let them know their options for paying it. We outline these below.

The personal representatives do this.

• If an account needs filing, the personal representatives will give the reference number to the pension scheme and ask for the information needed about the beneficiaries to complete the account.
• If an account isn’t needed and there is no inheritance tax due, the personal representatives can let the beneficiaries and the pension scheme know that. The scheme can then pay out the death benefits.
• Where inheritance tax is due, the personal representatives will determine how much of each pension death benefit is subject to inheritance tax. They must then tell the beneficiary and the pension scheme how much inheritance tax is due. HMRC intends to provide a calculator or tool for personal representatives to use.
• Where inheritance tax is due, the beneficiary can ask the scheme to pay it from the death benefits. The pension scheme must pay the tax to HMRC within three weeks and include certain information. They must also send that information and confirmation of payment to the personal representatives and beneficiary.
• Where the inheritance tax liability changes, the personal representatives are responsible for dealing with this.
  • If the liability increases in relation to pension benefits, there are three options for paying it, which we outline in the next bullet point. If the pension scheme has already fully paid out pension benefits, the personal representatives no longer have the option to ask the scheme to pay inheritance tax.
  • If the liability decreases, the personal representatives can reclaim any overpaid inheritance tax and pass it to the relevant beneficiary.

• Personal representatives pay from estate funds. Where the pension beneficiary is different from the estate beneficiary, the estate has a legal right to ask the beneficiary to repay the tax charge. This is an existing provision in inheritance tax rules.
• Beneficiaries can ask the pension scheme to pay the inheritance tax due from the pension funds. Based on the draft legislation pension schemes must offer this option where the inheritance tax liability is £4,000 or more. They can voluntarily offer this option where the liability is less than £4,000.
• Beneficiaries can take pension benefits in full and settle the inheritance tax directly with HMRC.

The death benefit may be subject to both income tax and inheritance tax. Where that’s the case, the beneficiary will only pay income tax on the amount remaining after paying the inheritance tax. Where the beneficiary pays inheritance tax outside the pension scheme, they can claim a refund of any overpaid income tax.

If you have pension or investment savings of £300,000 or more, Aviva Financial Advice can help you with your retirement planning. You can also visit gov.uk for more information.