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Change to inheritance tax rules and your ABF pension

06.01.2026

As a member of the scheme, your beneficiaries may be entitled to pension death benefits when you die. Currently, these benefits are not usually considered part of your estate and therefore not subject to inheritance tax. However, from 6 April 2027, the law will change to make most pension death benefits liable for inheritance tax. This change means pensions will need to be considered as part of estate planning in the future.

This news article sets out what these changes are and how they will apply to death benefits paid from the Scheme. 

When is inheritance tax payable? 

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. Once the new rules come into force, certain pension death benefits will also count towards the value of your estate for assessing inheritance tax liability. 

While you may be concerned about how these upcoming changes could affect you and your beneficiaries, it’s important to keep in mind that even once the new rules are in place, many death benefit lump sums and unused pensions will still be paid tax-free from the Scheme. This is because: 

  • The death benefits payable are exempt from the new rules (see next section). 
  • The value of your estate as a whole will fall below the inheritance tax threshold.
  • You may be eligible for one or more exemption that could reduce or eliminate your inheritance tax liability.

Inheritance tax is not usually payable on anything passed to a spouse or civil partner, and this will continue even with the new measures. You can also pass on any unused inheritance tax allowance to them which could increase their allowance. For example, if you die and your spouse or civil partner inherits your entire estate, any unused portion of your £325,000 nil-rate band can be passed on, potentially increasing their nil rate band to £650,000.

If a property is passed to a direct descendant, the residence nil-rate band may apply, increasing the threshold for inheritance tax by an additional £175,000. There are also other exemptions, such as those for charitable donations.

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

What type of death benefits will be in scope for inheritance tax from 6 April 2027?

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

  • 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 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. 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. 

Interaction with other tax liabilities

There are some circumstances where a death lump sum would also 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

In addition to any of the tax charges mentioned above, 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. 

The role of personal representative

Personal representatives will be responsible for reporting and paying inheritance tax due on relevant pension death benefits to HMRC. They will play an important role in liaising with the Scheme and beneficiaries to ensure this is achieved within 6 months of the date of death.

Under the new regulations, there will be three options for settling the tax charge.

  • It can be paid directly from the estate. 
  • If the amount of tax is more than £4,000, the scheme can be asked to deduct and pay the relevant tax directly to HMRC. 
  • Beneficiaries can meet their share of the tax due to HMRC once benefits have been paid.

Next steps

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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