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Update on changes to inheritance tax rules and pensions

05.09.2025

Currently, death benefits paid from the scheme to your beneficiaries are usually not considered part of your estate and therefore not subject to inheritance tax. However, in the 2024 Autumn budget, the government proposed a change to the law to make most pension death benefits liable for inheritance tax from 6 April 2027 onwards. After a short consultation, the government has confirmed it will proceed with this plan, albeit with some important exemptions to the original proposal. 

It’s important to consider if this change could affect you and to seek professional advice if required.

Who will be affected?

If the value of an estate when someone dies exceeds the threshold, currently set at £325,000, inheritance tax of 40% may be due on the excess. However, as explained in our January news story, even once the new rules are put in place, many death benefit lump sums and unused pension funds will continue to be paid tax-free from the Scheme. This is because they may either fall below the inheritance tax threshold or be eligible for exemptions or allowances that may reduce or eliminate inheritance tax liability. For example, anything left to a spouse or civil partner would be considered exempt and not liable for inheritance tax.

However, this change does mean that pension death benefits will need to be considered as part of estate planning in the future. The government has estimated that approximately 38,500 estates will pay more inheritance tax than they would have done previously under the old rules. They also estimate that a further 10,500 estates will become liable for inheritance tax in 2027/2028 due to this change in law. This means even if the value of your estate is not currently enough to trigger inheritance tax, it could be once the law changes, and any relevant pension death benefits are added to the value of the estate.

What type of death benefits will be included?

Whether you need to include a death benefit from the Scheme in the value of your estate for inheritance tax purposes depends on your status.

  • If you're currently paying in (active pension accounts) the death in service lump sum would usually continue to be considered excluded from inheritance tax under the new rules. However, all other death lump sums will count towards the value of the estate for inheritance tax purposes. This includes payment of the unused DC (Defined Contribution) fund value, AVC (Additional Voluntary Contribution) fund value or the return of contributions from the DB (Defined Benefit) section to your beneficiaries.

  • If you’re no longer paying in (deferred pension accounts), but you haven’t yet taken your pension, any death benefit lump sum paid from the deferred account would be in scope for inheritance tax under the new rules. This is the case for both DB and DC members. A spouse or civil partner’s pension paid from one of the DB sections would be exempt.
  • If you’re receiving a pension from one of the DB sections, the spouse or civil partner’s pension would still be exempt. However, any death benefit lump sum would be subject to inheritance tax. A lump sum would usually be paid to beneficiaries if you were under age 75 and you had been receiving your pension for less than five years.
  • If you’re receiving a dependant’s pension from us, you will not be affected by these changes as there are no death benefits payable from dependant pensions.

Personal representatives will be responsible for reporting and paying inheritance tax due on relevant pension death benefits to HMRC. However, if the amount of tax is more than £4,000, they can ask the scheme to deduct the relevant tax and pay it to HMRC on their behalf before the lump sum is paid to beneficiaries. The government has confirmed that further guidance for personal representatives will be issued in the future.

Interaction with other tax liabilities

There are some circumstances where a death lump sum would be subject to other tax liabilities.

The entire amount will be subject to income tax at the beneficiary’s marginal rate if:

  • a death benefit is paid more than two years after the Scheme is notified of the death
  • a death benefit is paid from an unused pension account where the deceased member was over age 75

Additionally, if you have exceeded the Lump Sum and Death Benefit Allowance, tax would be payable on the excess.

These rules will continue to be in place after the revised inheritance tax regulations come into force. This means a death benefit could be subject to both inheritance tax and income tax if one of the above circumstances apply. 

Next steps

There are some details which are yet to be confirmed, and as the government is currently consulting on draft regulations, it is still possible further changes could be issued. We will continue to update you on further developments.

If you think you could be affected by the changes, an estate planning specialist, such as a solicitor or an Independent Financial Adviser, will be able to make recommendations based on your personal circumstances. Visit the MoneyHelper website for more information on choosing a financial adviser.

Further information about death benefits payable from the Scheme can be found at the links below:

You can check on the latest value of your pension by clicking the ‘login’ in the top right-hand corner to access your secure member account.

If you’re a member of the DC section, you can make or change a nomination for a death benefit lump sum through your secure online account. If you’re a member of one of the Defined Benefit sections, you will need to complete a nomination form, available to download from the above links.

If you have any further queries about your pension, please contact us.

For more information on inheritance tax rules and allowances, visit the government’s website: www.gov.uk/inheritance-tax

 

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