Inheritance Tax on Pensions from 2027: Navigating the Practical Challenges

Much of the discussion has focused on the additional tax burden that some families may face. Less attention has been paid to what may prove equally significant: the practical challenge of administering estates under the new regime.

While the tax implications of the proposed changes are important, the operational burden on personal representatives and the knock-on effect that this will have on the administration of estates should not be underestimated.

The Government’s objective is clear: to reduce the use of pensions as a vehicle for passing wealth between generations and refocus them on their original purpose of providing retirement income. As a result, most unused defined contribution pension funds will form part of a person’s estate for IHT purposes from 6 April 2027.

Industry professionals have responded proactively to these proposals.

Pension Scheme Administrators and professional estate practitioners are working hard to understand their future responsibilities and implement the systems and procedures needed to comply.

However, there is a third group whose preparedness is less certain: pension scheme members and the people they have chosen to administer their estates after death.

Many future executors, particularly family members acting without professional support, may have little understanding of the new obligations they will face. HMRC has already issued technical guidance and further clarification is expected, yet significant practical questions remain.

As with many major legislative changes, the true impact is unlikely to become apparent until estates begin working through the process in real-life situations during 2027 and beyond.

The Burden on Personal Representatives

The people responsible for administering an estate, usually executors named in a Will, will need to gather information from pension providers, obtain valuations of assets, calculate liabilities, and ensure tax is paid within prescribed timescales. Interest begins accruing on unpaid IHT six months after death, and delays in obtaining information or being able to arrange for payment of the IHT could have financial consequences for estates and beneficiaries.

Where no executor is available and someone must apply to administer the estate, the process may become even slower because they have more limited authority before probate is granted. This creates the potential for delays at a time when strict tax deadlines apply.

Another practical challenge arises where pension benefits are distributed before the final IHT position has been established. Personal Representatives can ask pension providers to retain up to 50% of benefits for up to 15 months while matters are resolved. However, many practitioners question whether this period will be sufficient for more complex estates.

Planning ahead

While pensions will remain a valuable retirement planning tool, the inclusion of pension funds within the IHT framework creates a new layer of complexity.

Reviewing beneficiary nominations, updating Wills, reconsidering asset drawdown strategies and ensuring the right executor has been appointed can all help reduce future complications. The earlier these conversations take place, the more straightforward the estate administration is likely to be and the lower the risks of uncertainty and additional risk and costs for families when the time comes.

For more information on how the upcoming changes could affect estate administration and the responsibilities of personal representatives, contact Corrinne Emmett to discuss how ZEDRA can help.

Disclaimer: Nothing herein shall constitute legal, tax or investment advice of any kind and ZEDRA accepts no liability for any reliance placed on the contents herein which are solely included for the purposes of marketing ZEDRA’s service offerings. Advice should be sought from appropriately qualified advisers to assess the suitability of any solution to your specific circumstances.

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