Swings and Roundabouts for Pension Administrators

In the 2024 Autumn Budget, the government announced plans to levy Inheritance Tax (IHT) on unused pension funds and death benefits. Initially it was anticipated that pension administrators would be bearing the brunt of this change, however, the government confirmed on 21 July 2025 that responsibility for paying IHT would, instead, fall to the personal representatives/beneficiaries of a deceased's estate. This is welcome news for pension administrators, or, at least, the best they could have hoped for, short of reversing the policy change entirely.

The shift of responsibility to personal representatives and/or beneficiaries of a deceased's estate does not, however, mean that pension administrators can take a back seat. It is anticipated that the implementation of the new IHT charge will result in circa £60m in one-off costs to businesses (and, in particular, administrators) through the adoption of new internal policies and procedures, training, and IT systems to ensure compliance with the new legislation when it comes into force in April 2027. Pension administrators will need to ensure that they are in a position to provide accurate valuations of inherited pension funds quickly, as the proposed legislation requires this to be provided within 4 weeks of being notified of a member's death. They will also be required to inform non-exempt beneficiaries that they may be liable for IHT and otherwise work with personal representatives/ beneficiaries closely to ensure accurate information is provided to HMRC. 

The government states that it is committed to supporting businesses and individuals impacted by the changes and HMRC is due to publish guidance as well as a calculator to assist in determining whether IHT is payable at all.  Despite the promised support, preparing for this change will no doubt be a significant undertaking for pension administrators and professional personal representatives.

Whilst the government has confirmed that certain benefits will remain out of the scope of IHT (i.e., death-in-service benefits and defined benefit dependents' pensions), the full scope of its application is otherwise very broad, and all defined contribution pension pots and defined benefit lump sum death benefits will be within the scope of the new regime. Business Property Relief and Agricultural Property Relief will not be available for pension inheritance, though the spouse/civil partner exemptions and charity exemptions will still apply.  Government figures suggest the extension of IHT to unused pension funds and death benefits will raise an additional £640m in the 2027/28 tax year, increasing to an additional £1.4bn in revenue in the 2029/30 tax year.  

Despite the reduced burden for pension professionals in the new announcement, there will be those who do not think that the government has gone far enough in reducing that burden and there is speculation that similar revenue increases could have been achieved by other means. In particular, it has been highlighted that whilst only a small number of estates will see an increased IHT bill, many more than that will face increased complexity in the administration of estates, a particularly difficult pill to swallow when those impacted will already be navigating a bereavement.