From April, pensions will fall into the IHT regime in one of the biggest estate planning shifts in years. Harriet Betteridge, Partner at Charles Russell Speechlys, explains what this means for advisers, executors and clients.
The draft legislation on the inheritance tax (IHT) treatment of pensions, published in August, is one of the most significant shifts in estate planning in recent years. For financial advisers, it raises complex questions not only about the administration of estates, but also about how clients structure their wealth in the run-up to retirement.
From April of next year, pensions – long considered one of the most effective tools for intergenerational wealth transfer – will be pulled into the IHT regime. This will be the case even where trustees or scheme administrators have discretion over the distribution of death benefits, IHT will apply.
For the Treasury, the financial rewards are clear: an expected £1.46 billion in additional tax receipts by 2030. For advisers and their clients, the changes create new complications in estate administration and force a rethink of long-established planning strategies.
Executors in the firing line
The legislation places responsibility squarely on the shoulders of personal representatives (PRs). Executors, not pension scheme administrators, will have to report pension benefits to HMRC and ensure the tax is paid.
This relieves pension providers of an administrative burden, but could leave PRs in a challenging position. They will be liable for tax on assets over which they have no control, and in some cases may need to pursue beneficiaries to recoup IHT.
Cash flow is another concern. Executors may struggle to cover the liability before probate is granted, exposing them to penal interest on unpaid IHT. For many families, this will mean delays to distributions and more contentious estate settlements.
Advisers should prepare clients for the reality that acting as executor in a complex estate will become a more onerous responsibility.
Practical hurdles
The familiar spousal and charitable exemptions will still apply, ensuring that transfers to surviving partners or to charities remain IHT-free. Death-in-service benefits from registered pension schemes will also stay outside IHT.
However, unlike other assets, pensions will not benefit from business property relief (BPR) or agricultural property relief (APR). This limits flexibility and could come as a surprise to clients holding qualifying assets within pensions.
Beneficiaries will have a statutory right to ask scheme administrators to settle IHT liabilities directly from the pension, but only where the tax exceeds £4,000. The option is welcome but partial: PRs cannot make the request on behalf of minors or beneficiaries lacking capacity, a gap that is likely to cause real issues in practice.
PRs who pay the tax from the free estate can seek reimbursement, but in reality this means footing the bill upfront and relying on cooperation from beneficiaries. Inevitably, this will delay estate finalisation and create friction between executors and heirs.
Implications for advisers
For many years, drawing on taxable assets first and leaving pensions untouched has been a common practice. With pensions entering the IHT net, that advice will need to change.
Clients may need to consider drawing down pension savings earlier, adjusting nomination forms, or exploring whether leaving pensions to executors could simplify administration, though this won’t always align with family wishes and may have other downsides.
There may also be renewed interest in transferring assets out of pensions into structures that qualify for BPR or APR, though practical and valuation issues will limit the appeal for many. Lifetime gifting from pensions is another area to watch. HMRC is increasingly wary of individuals withdrawing large sums to make gifts, and tighter rules may yet emerge.
Advisers should act now by reviewing estate plans, especially where pensions form a large share of wealth, and modelling potential IHT liabilities to highlight pressures on executors. They should also discuss executor choices, ensure death benefit nominations are up to date, and explore liquidity options to cover tax efficiently. Finally, advisers must stay alert to Budget changes, including possible restrictions on pension drawdown and gifting, which could affect planning strategies.
Looking ahead
The government assumes that these reforms will raise billions without prompting significant behavioural change. In reality, advisers know clients will adapt, and that the pensions landscape is about to look very different.
Pensions are no longer the untouchable safe harbour in estate planning they once were. For advisers, this is a moment to demonstrate real value: helping clients navigate complexity, avoid pitfalls, and reshape their planning strategies for a new era of IHT.
By Harriet Betteridge, Partner, Charles Russell Speechlys
